Finding Balance, One Weight At A Time
It’s all about weight these days, but not the number on the bathroom scale. Weighting, as it relates to investing, and in particular the S&P 500, can be a very contentious subject with varying opinions on what is best, cap weighting or equal weighting.
The Basics: Market Cap vs. Equal Weighting
Market cap weighting assigns larger companies a more significant influence on the index's performance, reflecting their overall market size; consequently, a few large firms can disproportionately sway the index's movements.
In contrast, equal weighting gives each of the 500 companies an identical weight, thereby ensuring that smaller companies contribute equally to the index's performance. This approach can lead to different risk and return profiles; for example, equal weighting often results in higher volatility and the potential for greater returns during bull markets, as it provides more exposure to smaller, potentially high-growth firms. However, it can underperform in bear markets due to its lack of emphasis on established, larger companies that may be more resilient.
There is economic evidence that over time equally weighted indices outperform cap-weighted indices. Equally weighted indices, however, still have biases given sector weights are tied to the number of stocks in a sector.
But what if there was another way to even further balance the portfolio by sector so that it neutralizes exposure in a balanced approach that aims to protect the downside and participate in the upside?
This is where the Syntax Stratified LargeCap Index comes into play.
Introducing Stratified Weighting: A New Path to Balance
Stratified's sector weighting of the S&P 500 focuses on distributing investments across the 8 different sectors in a way that aims to reduce concentration risk and enhance diversification. Instead of following traditional market cap weighting, which can lead to heavy reliance on a few large sectors, Stratified’s approach often equalizes exposure to various sectors, with the goal of having a more balanced impact on the overall index performance.
Stratified Weighting defines sector neutrality in an absolute, not relative, sense. Each of the eight primary FIS sectors is assigned an equal weight of 12.5% of the index. This equal weighting process continues within each primary sector’s subsectors. For example, Financials has three subsectors (Banking, Real Estate, and Insurance), so the target weight for each is about 4.17% (12.5% / 3).
In total, each primary sector is subdivided into an additional four levels.
Why Does Stratified Weighting Matter?
This method can help investors capture growth across a wider range of industries while mitigating the risks associated with sector volatility. By strategically diversifying sector allocations, Stratified seeks to provide a more stable return profile over time.
Investing in the Stratified Large Cap Index: ETFs for Every Portfolio
The Stratified Large Cap Index approach is available to investors through two exchange-traded funds (ETFs): Stratified LargeCap Index ETF (SSPY): The Stratified Weight™ version of the S&P 500®, and the Stratified LargeCap Hedged ETF (SHUS): The Stratified Hedged Strategy that seeks capital growth.
These ETFs bring Stratified’s innovative sector-balancing method directly to investors, seeking a well-rounded, diversified approach with ease.
The Bottom Line
For investors looking to avoid the concentration risk and sector imbalances that can come with a traditional market cap or equal weighting, the Syntax Stratified LargeCap Index offers a compelling alternative. Its focus on true sector balance ensures exposure to diverse industries, seeking growth potential for long-term portfolios. With Stratified ETFs, achieving balance in investing is no longer just a goal—it’s prioritized.
Looking for a refreshing twist on weighting that goes beyond company size or count? Contact us or subscribe to the latest Stratified ETF updates!
Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (866) 972-4492 or visit our website at https://stratifiedfunds.com/investor-materials. Read the prospectus or summary prospectus carefully before investing.
The Funds are distributed by Foreside Fund Services, LLC. Exchange Traded Concepts, LLC serves as the investment advisor. Foreside Fund Services, LLC. is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.
Investing involves risk, including loss of principal. The Funds are subject to certain other risks, including but not limited to, equity securities risk, large-capitalization risk, index tracking risk, passive strategy/index risk, and market trading risk. Investing involves risk, including possible loss of principal. There can be no guarantee the Fund will meet its investment objectives.
SSPY Risks: The Fund is subject to certain other risks, including but not limited to, equity securities risk, large-capitalization risk, index tracking risk, passive strategy/index risk, and market trading risk. Investing involves risk, including possible loss of principal.
SHUS Risks: The Fund is actively managed using a proprietary process, and there can be no guarantee that the Fund's investment strategies will be successful. The Fund may invest in Underlying Funds or Securities that are managed with a passive investment strategy, attempting to track the performance of an unmanaged index of securities. This differs from an actively-managed fund, which typically seeks to outperform a benchmark index. Maintaining investments in securities regardless of their individual performance or market conditions could negatively affect the Fund's return. The Fund is subject to certain other risks, including but not limited to, equity securities risk, large-, mid-, and small-capitalization risk, and market trading risk. Investing in securities of small and mid-sized companies may involve greater volatility than investing in larger and more established companies. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Purchased put options may expire worthless and may have imperfect correlation to the value of the Fund’s sector based investments. Written call and put options may limit the Fund’s participation in equity market gains and may amplify losses in market declines. The Fund’s losses are potentially large in a written put or call transaction. If unhedged, written calls expose the Fund to potentially unlimited losses. The Fund invests in derivatives. Derivatives are financial instruments that derive their performance from an underlying reference asset, such as an index. The return on a derivative instrument may not correlate with the return of its underlying reference asset. Derivatives can be volatile and may be less liquid than other securities.
Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Investors may purchase or sell individual shares on an exchange on which they are listed. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. Eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Please see the prospectus for more details.
The Syntax Stratified LargeCap Index™ is the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Index. The Index is not sponsored by S&P Dow Jones Indices or its affiliates or its third-party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC, the parent company of Syntax Advisors, LLC. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).
The Syntax Stratified LargeCap Index™ is the property of Syntax, LLC, the Fund’s index provider. Syntax®, Stratified®, Stratified Indices®, Stratified Weight™, and FIS™ are trademarks or registered trademarks of Locus LP. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
Stratified Weight™ is the weighting methodology by which Syntax diversifies an index’s constituent companies that share “Related Business Risks.” Related Business Risk occurs when two or more companies provide similar products and/or services or share economic relationships such as having common suppliers, customers or competitors. The process of identifying, grouping, and diversifying holdings across Related Business Risk groups within an index is called stratification, and was designed by Syntax to seek to correct for business risk concentrations that regularly occur in capitalization-weighted indices and equal-weighted indices.
The Stratified Hedged Strategy combines the benefits of exposure to a Stratified Weight™ equity portfolio with a rules-based protection program managed by Exchange Traded Concepts to reduce the risk of losses due to market downturns.
Diversification does not ensure a profit or guarantee against a loss.
The S&P 500® Index is a market-capitalization-weighted index of the 500 leading publicly traded companies in the U.S.
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