Last week, we introduced our new ESG overlay that allows you to see ESG KPIs alongside traditional factor exposures for any given portfolio. We’ve also recently introduced a new Compare feature that allows Omega Point users to compare performance, risk, and exposure between multiple portfolios, ETFs, or securities. Today, we’ll use this tool to analyze ESG characteristics for the S&P 500, NASDAQ, and Russell 3000. We’ll also follow with our weekly market and factor update in a week that ended with a significant escalation of the US - China trade war.
Comparing Major Indices Using Omega Point’s ESG Overlay
As we’ve been digging into ESG trends using KPIs from our data partner OWL Analytics, we’ve heard from investors asking how they can easily screen indices like the S&P 500 across different ESG KPIs. With our new Compare tool, we’ll take a look at ESG metrics across three major US indices. If you missed some of our previous Factor Spotlights, we’ve decomposed performance for the pillars of Environmental, Social, and Governanceover the past 5 years and recognized a very positive recent trend for stocks that score well on ESG metrics.
Using the Compare tool is as easy as typing in the tickers or portfolio name that you’d like to see:
As you can see, in the Performance screen you can compare metrics like Sharpe and Max Drawdown for portfolios and indices. For today’s exercise, however, we’ll focus on exposure to ESG KPIs over the past 12 months for these three indices:
We can now cycle through the 12 individual KPIs from OWL’s ESG framework (full hierarchy below) to see how these indices measure up against each other. Below, we’ll highlight one KPI from each category. As a reminder, exposures are displayed as z-scores that essentially rank the raw ESG KPIs across the entire US market. Here’s a quick cheat sheet to help map exposures to percentiles:
Environmental: Pollution Prevention
While all three indices started off strong exposure (80-90th percentile) to Pollution Prevention, there’s been a drop in positive exposure for all three over the past year. The SPY and QQQ’s moved fairly in lock step, while the R3K tracked lower throughout the period.
Social - Employees: Diversity & Rights
In more encouraging news, all three indices increased their exposure to companies that score well on Diversity & Rights over the past year. The QQQ’s started at -0.01 exposure (50th), which rose to 1.16 over the past year (88th) . The same trend occurred for the other two, although the R3K now has the lowest exposure at 1.07 vs. the SPY at 1.32.
Social - Citizens: Human Rights
All three indices started the period with negative exposure to Human Rights (40-48th percentile). Their exposure then moved into positive territory towards the end of 2018, only to have them fall lower then where they started in the beginning of the period. They now sit as follows: QQQ at -0.52 (30th), SPY at -0.44 (33rd), and R3K at -0.39 (35th).
Governance: Management Ethics
In a surprising trend, exposure to companies that score well for Management Ethics fell fairly consistently over the last year. The indices started with SPY at 1.03, QQQ at 0.9, and R3K at 0.85, and ended the period with SPY at 0.33, QQQ at 0.31, and R3K at 0.27.
Compare is a powerful tool that allows you to quickly compare overall trends and exposures (ESG or otherwise) for any portfolio, index, or security in the model. By understanding where certain indices or portfolios have ESG deficiencies, investors can then use this framework to tweak their positions to align their investments with sustainable goals.
This Week's Market and Factor Update:
US Market (8/16/19 - 8/22/19)
- The market traded up since last Friday until meeting a buzzsaw on Friday (not captured in above chart), as China announced retaliatory tariff hikes on $75B of US products.
- Trump immediately escalated with a 5% tariff on an additional $550B in Chinese goods and “ordered” US companies to sever ties with China.
- The major indices responded with sharp losses on Friday and their fourth consecutive week of declines, as investor fears that worsening US - China relations will tank global growth continue to be inflamed.
- Fed Chair Powell’s Jackson Hole speech has the market currently baking in a rate cut in September, although more hawkish comments from other Fed officials suggested that it won’t exceed 25 bps.
- The 10Y and 2Y Treasury yield curve continued to trade in and out of reversion over the course of the week.
- Growth was the week’s biggest winner as it vaulted into positive normalized return territory.
- Momentum shed its Oversold designation after hitting a recent trough of -1.39 SD on 8/8.
- Market Sensitivity and Volatility continued to sell off.
- Size continued to get tumble, and is now on the precipice of becoming Extremely Oversold (-2 SD below the mean).
- Earnings Yield also sold off heavily after peaking at +1.48 SD above the mean on 8/5.
- US Total Risk (using the Russell 3000 as proxy) ticked up slightly, although the impact of Friday’s market action hasn’t been taken account here.
- Momentum was again the biggest winner worldwide, now poised to cross into positive normalized territory in the trend continues.
- Value continued its free fall after peaking at +2.06 SD above the mean on 7/25, now sitting deep in Oversold territory.
- Earnings Yield and Profitability both saw sizable negative normalized return, with the former entering Oversold space and the latter sitting at the threshold.
- Market Sensitivity and Volatility continued to sell off, just as we’d seen in the US.
- Global Total Risk (using the ACWI as proxy) remained exactly flat, although we’ll see if that trend holds after the markets were roiled on Friday.
If you’re interested in trying out the new Compare tool or ESG framework on your portfolio, or have any questions about our methodology, please don’t hesitate to reach out.