5 Equity Indices to Weigh Risk


Stephen Hammers of Compass EMP Funds discusses his firm’s five new equity indices that use risk weightings, rather than market cap. He uses some large-cap examples to explain how the indices work.

Kate Stalter: Today, my guest is Steve Hammers of Compass EMP Funds. Steve, you and I have talked several times before, but I know that you have some news today.

We typically have been talking about managed futures, but today you want to talk about some of your new volatility-weighted indexes. And these, as I understand it, are equity indexes. So can you begin by telling us why you launched these and why now?

Stephen Hammers: Yeah, we actually have several indexes on many different asset classes called the CEMP Volatility-Weighted Indexes. We released five. Dow Jones actually is publishing them and calculating them, the indexes.

We released five yesterday. That is: US Large Cap, US Small Cap, an international, and an emerging market, as well as a REIT.

The effect that these indexes have on the market, especially when you have other enhanced indexes out there that just focus on fundamentals, and the most popular indexes—like the S&P 500—focus on the cap weighting.

In my opinion, over the many, many years that I’ve been doing investing for institutions and mutual funds and so forth, most of the returns from these popular indexes, like the S&P 500, come from about 25% of the stocks. So you have very few stocks that contribute to the performance of these indexes.

So, for example, if you look at 2011, almost 80% of the return came from the top 25%. Most of the declines in the markets come from the top stocks in the S&P 500, because it puts all the weightings to the big names.