S&P Index Launch: Spreads on Gold, Oil, Stocks, and Bonds

Standard & Poor’s is launching a new index series today that aims to show inherent risk premiums between asset classes and the financial markets.  This has been measured privately for years by sophisticated investors, but the new index series will make this readily available to Joe Public.  The ‘S&P Factor Indices’ will effectively create a transparent risk-reward matrix that allows investors to track spreads between a long and short sub-index.

Tracking risk premiums is about to become much easier.  The S&P Factor Index Series will have each index composed of an equal-weighted long and short sub-index that will be calculated to reflect the corresponding spreads between assets.  This will show representations for bonds, stocks, crude oil, and gold.

The Long Sub-Index is comprised of long front futures contracts; the Short-Sub-Index is comprised of short front futures contracts.

This gives investors exposure to the price difference between Sub-Indices and the underlying futures contracts. Better yet, it is a live calculation and each index will be real-time.

The four indexes are as follows:

• Equity Risk Premium: Measures the spread of the U.S. stocks over the returns of long-term Government Bonds.
• Non-U.S. Dollar Equity: Measures the spread of the return of U.S. stocks over the return of the U.S. Dollar Index.
• Crude Oil – Equity Spread: Measures the spread of the return of Crude Oil over the return of U.S. stocks.
• Gold – Equity Spread: Measures the spread of the return of gold over the return of U.S. stocks.

Most likely, this Factors index list will expand if it is deemed a success.  Betting on oil versus stocks, gold over stocks, and stocks over bonds just got easier.

JON C. OGG