Syntax Stratified LargeCap Q1 2024 Review

Executive Summary

• The Stratified LargeCap Index (SYLC) returned 8.2% in Q1 vs. 10.6% for the S&P 500. Nearly half of the S&P 500’s growth (47%) was tied to four stocks: NVIDIA, Microsoft, Meta Platforms and Amazon.^[1]

• The Integrated Circuits sub-sector, and specifically NVIDIA, which returned 83% for the quarter, helped the S&P 500 outperform SYLC during the quarter.

• 2023 highflyers Tesla and Apple were down 29.3% and 10.9%, respectively. SYLC’s underweight to these securities helped SYLC outperform the S&P 500 in the Consumer Transportation and IT Hardware subsectors.

• SYLC returned 19.7% vs. 29.9% for the S&P 500 over the past twelve months as growth and momentum stocks continued to lead the market higher. Over the trailing 2-to-10-year periods, SYLC underperformed the S&P 500 by 1.3 to 2.4 percentage points annually. Since the start of the backtest in 1991,  SYLC has outperformed the S&P 500 by 2.6 percentage points annually.

• The results for SLYC continue to be in line with expectations: as a diversification strategy, it performs well during market reversals, but typically trails in momentum driven markets like those seen over the past year.

Domestic Equity Market Performance Summary

Large and mid-cap stocks followed up their strong Q4 23 performance with another quarter of double-digit returns, as shown in Exhibit 1. For Q1 24, large cap stocks (+10.6%) and mid-cap stocks (+10.0%), as measured by the S&P 500 and S&P 400 respectively, exhibited strong performance, distancing themselves from the S&P 600 small cap index which returned +2.5%. Within large cap stocks, growth (+12.8%) outperformed value (+8.1%).

The trailing returns highlighted in Exhibit 1 show the S&P 500 outperformed the Stratified LargeCap Index by roughly 10 percentage points over the past year ending 3.31.24. The trailing three- and five-year results show annualized underperformance of roughly 200 basis points relative to the S&P 500.

Exhibit 1: Domestic Equity Market Performance Summary (%)

The U.S. stock market continues to perform well even in the face of geopolitical headwinds, higher oil prices, and the prospect of prolonged higher interest rates given the strength of the economy. For the S&P 500, Q1 performance continued last year’s trend of strong performance from a narrow set of the largest stocks. While the results in 2023 were led by the Magnificent Seven (Apple, Alphabet, Amazon, Meta Platforms, Microsoft, NVIDIA, Tesla), Q1 2024 saw an even narrower market: just four of the Magnificent Seven (NVIDIA, Microsoft, Meta Platforms and Amazon) accounted for 47% of the return of the index for the quarter. This quarter saw two of the Magnificent Seven down meaningfully; Tesla declined 29.3% and Apple was down 10.6%.

The results for the last 10 calendar years are shown in Exhibit 2 below. These results are consistent with expectations as returns for the past ten years have been predominantly driven by growth-oriented tech stocks, with the S&P 500 generating double digit returns in 7 of the 10 years. Stratified LargeCap’s strongest outperformance came in 2022 when it outperformed by 930 basis points as momentum and growth stocks fell out of favor.

The goal of the 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 scheme is designed to reduce concentration risk to both individual stocks and sectors. Over the life of the index since its 1991 backtest inception, the results show an annual outperformance relative to the S&P 500 of 2.6 percentage points per year.

Exhibit 2: Stratified LargeCap  Calendar Year Performance Relative to S&P 500

Each of the eight primary Syntax FIS sectors is assigned an equal target weight of 12.5% of the index to support the diversification of business risk. As you can see in Exhibit 3, the SYLC primary sectors (shaded in grey) have similar weights, with the differences from the 12.5% target weight being tied to market movement between the latest quarterly rebalance on 3.15.24 and quarter end. This principle of equally weighting sectors is extended to sub-sectors, which are also shown in Exhibit 3, and extends further to industry groups, sub-industries, and business activities to further enhance diversification.

Exhibit 3: Stratified LargeCap (SYLC) and S&P 500 Asset Allocation

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 Comments: SYLC vs. S&P 500

• SLYC has 25% of the index in the technology-heavy Information and Information Tools sectors.

• The S&P 500 has just shy of half (47.8%) of its holdings in this these sectors.

• Two years ago, the S&P 500 weight to Integrated Circuits was 6.2%; it is now 8.5% tied to growth in NVIDIA which has gone from 1.8% of the index to 5.1%.

• The S&P 500 primary sector weights vary from 5.5% to 27.3%, highlighting large sector imbalances.

• Healthcare, Industrials and Financials have relatively similar weights in both indices.

• SYLC has meaningful overweights to the Consumer, Energy and Food sectors.

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Exhibit 4 looks at the performance of Stratified LargeCap relative to the S&P 500 by primary sector, with the results sorted from highest to lowest based on the SYLC results. All eight of the primary sectors produced positive results; within the S&P 500 only the Consumer Products and Service sector posted negative results driven by the nearly 30% decline in Tesla. SYLC’s diversification within this sector generated favorable results (+8.2%) relative to the S&P 500 (-0.8%). The Information sector returned 3.7% for SYLC but the index lagged the S&P 500’s 12.6% return which was driven by the performance of Meta Platforms (+38%) and Amazon (+19%) and their large positions in the index.

Exhibit 4: Stratified LargeCap (SYLC) and S&P 500 Q1 2024 Performance by Primary Sector

To get a more granular view of the market’s performance, Exhibit 5 displays primary sector performance results and its constituent sub-sector components. Even though SLYC holds the same securities as the S&P 500, its alternative weighting scheme produces a different return pattern, particularly when large positions in the S&P 500 outperform or underperform. This can be particularly helpful to SYLC’s relative performance during periods when large individual stocks within the S&P 500 struggle.

Exhibit 5: Stratified LargeCap And  S&P 500 Performance By Sub-Sector

Integrated Circuits returned 12.3% within SYLC, making it the fourth highest returning sub-sector behind Insurance (+16.3%), Oil & Gas (+16.0%) and Industrial Services (+13.7%). Within the S&P 500, Integrated Circuits returned 40%, led by the 83% return of NVIDIA, which continued to benefit from its market leading position with microprocessors that support AI applications. On the other hand, SYLC significantly outperformed the S&P 500 in two sub-sectors. Within IT Hardware, SYLC returned 8.7% vs. -8.3% for the S&P 500, with the results in the S&P 500 being driven by the large position in Apple stock which declined 10.6%. Consumer Transportation within SYLC returned 5.7%, outperforming the -14.8% return in the S&P 500 which was driven by the near 30% decrease in Tesla.

‍Conclusion

Q1 2024 continued the high-growth trend seen in Q4 2023, with the S& 500 Index posting double digit returns in both quarters. However, the most recent quarterly results were led by a smaller band of four mega cap stocks (Amazon, Meta, NVIDIA, Microsoft), which accounted for about half of the market’s return. On an absolute basis, SYLC performed well, returning 8.2% for the quarter. On a relative basis, SYLC underperformed the S&P 500’s 10.6% return by 240 basis points. SYLC provided some protection on the downside associated with the declines in Tesla and Apple, but the strong performance of a few stocks, most notably NVIDIA, were difficult for a diversified strategy that avoids concentrated positions in individual stocks to keep up with.

As we look forward to the rest of 2024, it will be interesting to see if the market can continue to be led by a handful of stocks, or whether the market becomes broader based. Historically, such narrow markets have proven to be unsustainable, sometimes collapsing dramatically as with the DotCom bubble burst. At Syntax, we do not predict market returns. Rather, the thesis for SYLC and our family of Stratified Weight indices is to diversify business risk. If you are concerned about the concentrated business risk embedded in the S&P 500, consider the Stratified LargeCap Index as a complement to help provide more balance.

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‍¹ https://www.spglobal.com/spdji/en/documents/commentary/market-attributes-us-equities-202403.pdf

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About Syntax

Syntax LLC is a financial data and technology company that codifies business models. Syntax operates through three segments: Company Data, Wealth Technology, and Financial Indices. Using its patented FIS® technology inspired by systems sciences, the Company Data segment offers the most comprehensive, granular, and accurate product line revenue data available on the market. The Wealth Technology segment then uses this abundance of data to facilitate the instantaneous creation and ongoing management of direct indexing solutions and rules-based equity portfolios through a fully automated platform. The Financial Indices segment enables Syntax to deliver customized and proprietary indices, including core global benchmarks and micro- and macro-thematic, smart beta, defined outcome, and target volatility indices. These indices are foundational for a range of financial products, such as ETFs, UITs, and structured products. Learn more at www.syntaxdata.com.

Important Disclaimers

Past performance is no guarantee of future results. All performance presented prior to the inception date is backtested performance. Backtested performance is not actual performance but is hypothetical. The inception date of the Syntax Stratified LargeCap Index was December 27, 2016. The backtest calculations are based on the same methodology that was in effect when the index was officially launched. Back-tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. Charts and graphs are provided for illustrative purposes only.

The Syntax Stratified LargeCap Index (“the 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. 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”). Syntax®, Stratified®, Stratified Indices®, Stratified Weight™, and Locus® are trademarks or registered trademarks of Syntax, LLC or its affiliate.

Index performance does not represent actual fund or portfolio performance and such performance does not reflect the actual investment experience of any investor. An investor cannot invest directly in an index. In addition, the results actual investors might have achieved would have differed from those shown because of differences in the timing, amounts of their investments, and fees and expenses associated with an investment in a portfolio invested in accordance with an index. None of the Syntax Indices or the benchmark indices portrayed herein charge management fees or incur brokerage expenses, and no such fees or expenses were deducted from the performance shown; provided, however, that the returns of any investment portfolio invested in accordance with such indices would be net of such fees and expenses. Additionally, none of such indices lend securities, and no revenues from securities lending were added to the performance shown. Benchmark data for the S&P 500 is provided by S&P Dow Jones Indices.

This report is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this presentation has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used in this presentation, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein.

This report and the information herein may not be reproduced (in whole or in part), distributed or transmitted to any other person without the prior written consent of Syntax. Distribution of Syntax data and the use of Syntax indices to create financial products requires a license with Syntax and/or its licensors. Investments are not FDIC insured, may lose value and have no bank guarantee.

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This document is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon, for legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. Please see page 8 for additional important information.