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Diversifying with the Defined Risk Strategy


Swan Research — Innovative Thought Leadership

As investors seek port­fo­lio diver­si­fi­ca­tion in an era of index invest­ing, a num­ber of indices are often con­sid­ered when con­sid­er­ing expo­sure dif­fer­ent asset class­es. The first ques­tion is which indices or asset class­es are appro­pri­ate. But a deep­er ques­tion lingers, are the indices diver­si­fied them­selves?

These days the go-to bench­mark for stock mar­ket per­for­mance is the S&P 500 index. But how much of “the stock mar­ket” does the S&P 500 real­ly cov­er?

The S&P 500 is a mar­ket-cap­i­tal­iza­tion weight­ed index of 500 U.S. based com­pa­nies, select­ed by a com­mit­tee to broad­ly rep­re­sent the U.S. econ­o­my. Since the index is cap-weight­ed there is def­i­nite­ly a large-cap bias to it. The top 10 S&P 500stocks have con­tributed more than 100% of the index’s year-to-date gain so far in 2018. Mean­while, the top 5 stocks have con­tributed over 90% of the S&P 500’s year-to-date gain. (Source: Morn­ingstar,  as of 7/1/2018). By design, the S&P 500 does not include small cap com­pa­nies or non-U.S. based firms.

Does that mat­ter?

Cer­tain­ly from a port­fo­lio con­struc­tion stand­point it seems log­i­cal that an investor would desire to have as many “tools in the tool­box” as pos­si­ble. Inten­tion­al­ly lim­it­ing one’s oppor­tu­ni­ty set to only large cap U.S. invest­ments seems nar­row-mind­ed and self-defeat­ing.

The next ques­tion becomes, how best to invest across dif­fer­ent asset class­es and indices?

With that in mind, the Swan Defined Risk Strat­e­gy is a mul­ti-asset hedged-equi­ty strat­e­gy that has been applied to the U.S large cap, U.S. small cap, for­eign devel­oped, and emerg­ing mar­kets equi­ties.

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By |2018-10-02T10:36:57+00:00September 25th, 2018|Research, Uncategorized|0 Comments