White paper

Sep. 25, 2016

Diversifying with the Defined Risk Strategy

White Paper — Overview

As investors seek portfolio diversification in an era of index investing, a number of indices are often considered when considering exposure different asset classes. The first question is which indices or asset classes are appropriate. But a deeper question lingers, are the indices diversified themselves?


These days the go-to benchmark for stock market performance is the S&P 500 index. But how much of “the stock market” does the S&P 500 really cover?


The S&P 500 is a market-capitalization weighted index of 500 U.S. based companies, selected by a committee to broadly represent the U.S. economy. Since the index is cap-weighted there is definitely a large-cap bias to it. The top 10 S&P 500stocks have contributed more than 100% of the index’s year-to-date gain so far in 2018. Meanwhile, the top 5 stocks have contributed over 90% of the S&P 500’s year-to-date gain. (Source: Morningstar,  as of 7/1/2018). By design, the S&P 500 does not include small cap companies or non-U.S. based firms.


Does that matter?


Certainly from a portfolio construction standpoint it seems logical that an investor would desire to have as many “tools in the toolbox” as possible. Intentionally limiting one’s opportunity set to only large cap U.S. investments seems narrow-minded and self-defeating.


The next question becomes, how best to invest across different asset classes and indices?


With that in mind, the Swan Defined Risk Strategy is a multi-asset hedged-equity strategy that has been applied to the U.S large cap, U.S. small cap, foreign developed, and emerging markets equities.

Research from this Author