Just because something is "new and improved" doesn't mean you should rush out to get it. Sure, some people want a new car every model year...
Just because something is “new and improved” doesn’t mean you should rush out to get it.
Sure, some people want a new car every model year or two, or upgrade to the very latest version of hot appliances or computer technology. But when something is new and improved in the investment world, adopting it with a sense of caution makes sense.
That’s true with the investment world’s latest “new improvement,” which was unveiled recently when Standard & Poor launched its new, hotly anticipated “Style” and “Pure Style” indices.
The two series of indexes will soon be available in the form of index funds or exchange-traded funds, but they will also become very powerful benchmarking tools for ordinary investors.
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The question is how quickly investors should gravitate toward what some are calling the next generation of indexing.
It’s safe to say that existing indexes and index products are not going the way of the eight-track tape, but the new developments put an interesting twist on what’s available.
The Style index series amounts to a fine-tuning of S&P’s current methodologies; unless you are a true technician — or a Chartered Financial Analyst — you’re unlikely to see that much difference.
But Pure Style is different, because it distills “growth” and “value” to their most essential elements.
By most definitions, a stock qualifies for the “growth” label when its revenues and/or profits are rising faster than its industry or the overall market; a growth stock should amount to a great stock at a good price, where a value issue is priced low relative to sound and solid fundamentals, making it a good stock at a great price.
Up to now, any time you looked at a specialized version of an index, you were getting a bit of a mess. Technically, for example, all 500 stocks in the Standard & Poor’s 500 had to be categorized as “growth” or “value,” even though many of those issues truly fell somewhere in the middle.
To frame it simply: You could split the S&P 500 into S&P 500 Growth and S&P 500 Value. The two specialized indexes equaled the whole.
The result has been that growth and value index measures were a bit too similar; they tended to move together and the picture they gave was a bit murky because there was an element of growth in the value picture (and vice-versa).
In the Pure Style system, stocks that don’t measure up as growth or value are simply left out. There are no ambiguities; a Pure Style growth index includes only stocks that, based on a number of measures, truly earn their designated label.
“Someone who really wants to focus on growth is not concerned about stocks that are left out in the middle,” says David Blitzer, managing director and chairman of the index committee at Standard & Poor’s.
“This also allows the pension-fund manager — or the individual investor — to see if that growth fund they bought really is delivering the essence of growth, kind of performance they expect from, say, a large-cap growth fund.”
Chuck Jaffe is senior columnist at CBS Marketwatch. He can be reached at email@example.com or Box 70, Cohasset, MA 02025-0070.