Step 3 – Defensive Component:
A “defensive sentiment” overlay is used to rank the final 100 stocks. This overlay rewards stocks that historically have performed well in weak markets and have strong free cash-flow yield and strong dividend yield.
The top 50 stocks are then weighted exponentially so that the top 50 represent a range of 2.67% (for the highest-ranked stock) to 0.96% for the 50th-ranked stock, and each of the bottom 50 stocks is given a flat weighting of 0.35% in SBRQAM.
I have selected three broad-based market-weighted indexes as comparison for SBRQAM. Our goal in performing this comparison is twofold:
- Assess the effectiveness of SBRQAM’s stock selection process relative to an investment in a broad-based market-cap-weighted index. For this analysis, we will compare SBRQAM to the S&P Composite 1500.
- See whether SBRQAM could work as a “core enhancer” to two indexes, where the ETFs linked to the index represents substantial assets.
|Index||# Of Stocks|
|CRSP U.S. Total Market Index (CRSP) –
|S&P Composite 1500 Index (S&P 1500) –
|S&P 500 Index (S&P 500) –
|Sabrient Multi-cap Insider/Analyst Quant-weighted Index (SBRQAM) – Launched 4/4/2011||100|
The S&P 1500 Index and SBRQAM start from the same universe of stocks. The S&P 1500 ranks all of the constituents by market cap, whereas SBRQAM follows the ranking and winnowing process described above.
The question is, how well does this security selection process actually work? Below are some key charts to help understand the differences:
The chart above shows that an investment of $100 would have grown to over $434 since Jan. 1, 2002 if invested in the SBRQAM Index; whereas an investment of $100 in the S&P Composite 1500 for the same time period would have only returned $188.