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Understanding the S&P 500 as a Benchmark for an Offshore Portfolio Thumbnail

Understanding the S&P 500 as a Benchmark for an Offshore Portfolio

Did you know that an estimated $13.5 trillion in assets are indexed or benchmarked to the Standard & Poor’s 500 Composite Index, including $5.4 trillion in index assets?1

The S&P 500 is ubiquitous – we see it on the news, read about it in the newspapers, and very likely, see some of our own investments’ performance compared against it. For an index that represents approximately 80% of the value of the U.S. equity market (not the global market), it may be worthwhile to gain a better understanding of how it works.1  The index's performance gives a good representation of the state of the U.S. market, but it does not fully represent it. Further, it does not represent the other markets around the world. Therefore, we will also endeavor with this blog to describe how investors can utilize investments to diversify out of the U.S. market with a Swiss asset manager.

Cap & Criteria

The index, as we know it today, was introduced in 1957 and is maintained by the Standard & Poor’s Index Committee. Contrary to popular belief, it is not comprised of the 500 largest companies in America but is a collection of large-cap stocks representing a broad range of market sectors, including technology, energy, health care, and consumer staples, among others.2

There are a number of criteria a company must meet to be considered for inclusion in the index. Some of these criteria include the following: it must be a U.S. company, have an unadjusted market capitalization of $14.6 billion or more, have 50% of its stock available to the public, and have four consecutive quarters of positive earnings.2

Changes Over Time

Another common misconception is that the index is a static one. In fact, companies will be removed, from time to time, for reasons that include violation of one or more of the criteria used for adding companies, or because of a merger, acquisition, or significant restructuring, including bankruptcy.

The turnover in the index’s constituent companies was 3.6% in 2020 (per the most recent data available). According to one projection, the average tenure of companies in the index is expected to fall to 15-20 years this decade, as compared to the 30-35 year average tenure in the late 1970s.3

Add and Subtract

When changes are made to the index, many mutual funds and exchange-traded funds that seek to replicate the index may have to sell stocks that are being removed and buy the stocks that are being added in order to track the index. Keep in mind that amounts in mutual funds and ETFs are subject to fluctuation in value and market risk. Shares, when redeemed, may be worth more or less than their original cost.

Important Note: Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. Investors cannot invest in an index. Also, index performance is not indicative of the past performance of a particular investment, and past performance does not guarantee future results. Investment choices designed to replicate any index may not perfectly track it, and their returns will be reduced by fees and expenses.

Diversifying out of the U.S. Market

The U.S. market makes up about 60% of the global stock market. While this is great for American investors, it also means that when they are solely invested in the U.S. market, their portfolios are left overexposed to the risk factors of the U.S. economy, banking system, and political swings. It also can lead to investors missing out on the opportunity to build their wealth structure and work on stabilizing their portfolio by actively investing in the other 40% of the world's markets. One way to work on managing the risks posed to a portfolio solely holding U.S. market equities or investments is by looking to offshore investing and banking in safe and competitive markets outside of the U.S. system. Each banking jurisdiction and stock exchange offer different benefits; one such high-level economy and banking jurisdiction is Switzerland. 

To touch quickly on Switzerland, a few key factors should be mentioned. 

  • The Swiss franc has become a safe haven currency for turbulent times and a currency that holds its value in both good and poor economic cycles. 
  • Switzerland has a debt-to-GDP ratio of 41.4%.4 As a comparison, the current debt to GDP of the U.S. is estimated to be 137.2%.5
  • Investors look to the Swiss franc as an investment when political changes or economic challenges affect their home country.
  • The Banking Secrecy Act protects an individual's information under the punishment of the law. 
  • Switzerland is politically and militarily neutral. 
  • Switzerland is not a part of the EU or Euro Zone.

Learn more about the Swiss Financial Jurisdiction here: (Switzerland as a Financial Jurisdiction).

As briefly mentioned before, professional investors use indexes to see how their investments are performing. An investor can use the S&P 500 to see how their offshore investment portfolio is doing in comparison to their domestic portfolio. When the U.S. market faces hard times, it does not mean other markets are facing the same issues or have the same economic environment. This is when finding a Swiss-registered investment advisor specializing in investing outside of the U.S. markets and dollar can be of big help to investors. They can be of great service in helping you build a portfolio that will help diversify an overexposed U.S. portfolio to gain access to offshore investments that will help minimize the risk that the U.S. markets hold. When working with a Swiss investment advisor, you can apply the knowledge you have learned about how indices work to see how your offshore investments are performing against the U.S. market. 

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  1. https://www.spglobal.com/spdji/en/documents/index-news-and-announcements/spdji-indexed-asset-survey-2020.pd
  2. https://www.investopedia.com/articles/investing/090414/sp-500-index-you-need-know.asp
  3. https://www.innosight.com/insight/creative-destruction/
  4. https://tradingeconomics.com/switzerland/gdp-growth-annual
  5. https://tradingeconomics.com/united-states/government-debt-to-gdp
  6. https://www.investorsinproperty.com/news/2020-05-06/the-swiss-franc-a-safe-haven-truth-or-myth