An Exclusive Q&A with Paul Kenney from Syntax on the Syntax Stratified LargeCap Index™

In this Q&A, Paul Kenney (SVP of Client Relations at Syntax) explores how the Syntax Stratified LargeCap Index differs from traditional market-cap-weighted indices like the S&P 500. He discusses how stratification adjusts sector exposure, navigates market cycles, and compares it to other weighting approaches like equal weighting and factor investing.

Kenney also digs into rebalancing, corporate actions, and how this strategy plays out in both bull and bear markets.

Let’s dive in and see how this strategy holds weight.
 

How does the Syntax Stratified LargeCap Index differ from traditional market-cap-weighted indices like the S&P 500?

Traditional cap-weighted indices represent specific segments of the market (U.S. large-cap, U.S. small-cap, international development, etc.) with an approach that holds companies based on their market cap weight. The only adjustment that is typically made is to modify the weight by the company’s liquidity (free float). As a result, these indices are inherently biased toward large sectors and companies, limiting diversification.  

The goal of the Syntax Stratified LargeCap Index is to deliver an unbiased return that is representative of all the business opportunities in the market, not just the largest ones. The index holds the exact same stocks as the S&P 500; the only difference is the weighting. To reduce sector concentration risk, each of the eight Syntax sectors is assigned an equal target weight of 12.5% of the index. This principle is extended to equally weight sub-sectors within their sectors, industries within their sub-sectors, and so on, down to equally weighting companies within their business activity groups. This process seeks to enhance diversification not only at the sector level but at the lower levels as well.    
 

What specific sector or industry biases does stratification help manage, and how does this impact performance during different market cycles?

The Syntax Stratified LargeCap Index manages the S&P 500’s exposure to the Information Tools and Information sectors, which presently make up more than half of the index, as shown in the graph below. 

Sector exposure as of 12/31/2024 based on primary business line exposures. Source: Syntax, S&P Dow Jones Indices

It also aims to reduce individual security risk. The graph below shows that the top 10 holdings in the S&P 500 as of year end 2024 were 38.7% of the portfolio. To put this in perspective, the weight of Apple, Microsoft, and NVIDIA are all roughly equal to or greater than the individual weights of the Consumer, Energy, and Food sectors.

S&P 500 constituent, sector, and sub-sector weights as of 12/31/2024. Source: Syntax, S&P Dow Jones Indices. *Includes Alphabet A & C shares. 

 

The benefits of Syntax Stratified LargeCap Index’s diversification are:

• Reduced concentration risk to individual securities
• Sector-driven downturn risks are reduced by more balanced sector exposure
• Increased ability to take advantage of mean reversion in recoveries from market-wide crashes
• Exposure to an increased opportunity set of small and growing industrie

 

How does the rebalance methodology work, and how often does the index adjust its weights to maintain its stratified structure?

Our Syntax Stratified LargeCap Index (using the same constituents as the S&P 500) follows the exact rebalancing schedule of the S&P 500 (3rd Friday of March, June, September, and December); this approach was chosen for two reasons:

1. To eliminate a source of possible difference when comparing performance against the benchmark
2. To reduce the cost of rebalancing, as the market tends to be deeper on the days when those benchmark indices rebalance, which also coincides with expiration of stock options, stock index futures, and stock index options contracts.
    

What are the main criticisms of the stratified approach, and how does Syntax respond to concerns about potential underperformance in strong bull markets led by a few dominant stocks?

The main criticism we find with Syntax Stratified LargeCap Index is the underperformance in narrow and momentum-driven markets. While this is understandable, it is important to note that the excess returns earned by the S&P 500 during these periods can also be the fuel that leads to future market reversals. 

It is also important to think about how the Syntax Stratified LargeCap Index fits within a portfolio. Since the index holds the same securities as the S&P 500, it can be considered a core strategy based on its holdings. It can also be a complement to the S&P 500, moderating its exposure to tech stocks and providing additional exposure to Energy, Food, and Consumer stocks. A blend of the two strategies, (for example 2/3rds S&P 500 and 1/3rd Syntax Stratified LargeCap Index) may help bring better balance to an investor’s portfolio. 
 

How does the Index handle corporate actions like mergers, spin-offs, or bankruptcies differently from a traditional market-cap-weighted index?

The Syntax Stratified LargeCap Index follows standard corporate action handling for equally weighted indices. Additional details on specific corporate action treatment can be found in the Index’s rulebook. Index calculation and corporate action implementation for the Syntax Stratified LargeCap Index are performed by S&P Dow Jones Indices.
 

Given the growing interest in factor investing and alternative weighting methodologies, how does Syntax see the future of stratification compared to approaches like equal-weighting or fundamental indexing?

We believe stratification as a methodology is favorably positioned.

• Equal weight indices address individual security concentration risk but are unbalanced from a sector perspective as the sector weight is a function of the number of securities in each sector. As a result, equally weighted indices are biased toward sectors with many companies in them and are biased away from those with relatively few companies.
• Factor investing seeks to tilt a portfolio to an individual factor or create a portfolio that blends or balances factors.  The challenge investors face is that factors can be opaque, not intuitive, and may be less causally linked to stock performance than Syntax’s granular classification data is.
• Stratification is an alternative weighting methodology, and relative to other approaches, we believe it offers a number of benefits. For example, balancing business risk by equally weighting sectors and within sectors is a relatively simple concept to grasp.  Additionally, the strategy has full transparency in both the portfolio construction process and the holdings. Finally, the distinct strategy is focused on absolute rather than relative exposure. The term market or sector neutral in the investing world means the strategy has the same sector weights as the benchmark; however, this is not neutral from our perspective. This means following a benchmark, such as the S&P 500, investors are taking a view that the largest sectors will continue to outperform the smaller ones. This challenges the notion of neutrality in our view, as it implicitly takes a bullish or bearish view on particular business risks. For more information, please see https://www.syntaxdata.com/research/redefining-sector-neutral.

Given the high degree of uncertainty regarding the current macroeconomic climate and the challenges of consistently and accurately predicting business risk shocks, we believe that the most prudent strategy is to neutralize as many business risks as possible. The Stratified Weight methodology takes neither a bullish nor bearish view on any business risk, seeking to simultaneously balance individual stock, sector, industry group, and industry risks. We believe that the increased diversification allows the Stratified Weight approach to capture higher risk premia over the longer term than a comparable cap-weighted index.