SSPY: A Smarter, Resilient Approach to Reducing Market Volatility
The S&P 500 aims to represent the overall U.S. economy, but its industry/sector and company weightings can become skewed due to market performance because it doesn’t weight each sector equally. When a high-performing sector and/or stock gains a larger share in the index, it can heighten volatility as sectors shift and rotate. The Stratified Weighting Methodology seeks to decrease volatility and therefore increase long-term performance by utilizing a proprietary weighting system.
Why Sector Balance Matters: Analyzing Information Technology
This can be exemplified by taking a closer look at slices of the sectors and comparing and contrasting the holdings. We will start with the biggest sector, Information Technology.
This sector includes companies engaged in the design, development, and support of computer operating systems and applications. It also includes companies that make computer equipment, data storage products, networking products, semiconductors, and components.
SSPY vs. S&P 500: A New Take on Sector Weights
The main difference, starting from the top, is how Stratified assigns weights to sectors compared to the S&P 500. In the Stratified LargeCap Index ETF (SSPY), Information Technology had a weight of 14.66% vs the S&P 500 Index where Information Technology had a weight of 31.7% (as of the end of the 3d quarter).
In general, there are positives and negatives to having a specific sector carry a larger weight. A higher weighting for a specific sector in the S&P 500 can drive index gains when that sector performs well, potentially boosting investor returns. However, this concentration also increases the index's vulnerability to downturns in that sector, reducing diversification and increasing risk if the sector underperforms.
Sector Snapshots: A Look at SSPY’s Weighting in Action
Let’s look at some individual stocks in the Information Technology sector:
For a full list of SSPY's holdings please click here. Holdings are subject to change.
Apple, Microsoft, and Nvidia are the three largest stocks in this sector in the S&P 500 Index at 7.28%, 6.57%, and 6.14% respectively. In contrast, SSPY holds Apple at 0.53%, Microsoft at 0.34% and Nvidia at 0.14%.
Managing Risk with Balanced Exposure in Tech Giants
These overweight positions provide outsized returns to this sector when they are going up. However, these stocks have high BETAs (1.24, 0.9, and 1.67, respectively), so when this sector turns negative, they will provide excess negative returns, which translates to increased volatility in your investments.
BETA measures a stock’s volatility compared to the overall market. A BETA of 1 means the stock moves in line with the market, above 1 means it’s more volatile, and below 1 means it’s less volatile. A more balanced weighting approach, like Stratified employs, attempts to better moderate large swings in either direction and therefore may provide resilience to the fund.
Smaller Stocks, Bigger Impact: How SSPY Elevates Growth
On the other end of the spectrum is a stock like F5 (FFIV), which holds one of the smallest weights in the IT sector of the S&P 500 at just 0.03%. It has a 0.21% weighting in SSPY and has risen nearly 30% year-to-date. Due to its smaller market cap, F5 has a low weighting in the S&P 500 index. However, Stratified’s more balanced weighting approach assigns it a larger share, allowing its growth this year to make a more significant contribution to SSPY's overall portfolio return.
SSPY's Approach to Smoother Performance
In this small example within one sector, the main difference truly lies in the weighting. SSPY consistently has a lower beta than both the equal-weighted and cap-weighted S&P 500 indexes, with a beta below 1 in nearly all time periods. This means SSPY may help reduce your portfolio’s volatility. Its distinct weighting system is designed to limit large market swings, offering a more resilient and balanced portfolio.
To learn more about how SSPY's Stratified Weighting Methodology may reduce volatility by evenly distributing weight across sectors and mitigating the risks associated with over-concentration, please visit stratifiedfunds.com/sspy.
Some or all of the companies listed in this article may be held in the fund. For a full list of SSPY's holdings please click here. Holdings are subject to change.
Beta is a measure of an ETF's volatility or systematic risk of a security or portfolio compared to the market.
S&P 500® Index: (registered trademark of The McGraw-Hill Companies, Inc.) is an unmanaged index of 500 common stocks primarily traded on the New York Stock Exchange, weighted by market capitalization. Index performance includes the reinvestment of dividends and capital gains.
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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.
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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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