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Simplifying the U.S. Corporate Bond Market

Since it was first established as an index in 1957, the S&P 500 has been widely adopted by the financial community as the barometer of the large-cap U.S. equity market. As of Dec. 31, 2014, over USD 7.8 trillion is estimated to be benchmarked against the index, with indexed (passively managed) assets making up approximately USD 2.2 trillion. Just as the equity shares of the companies in the S&P 500 represent the performance of domestic large-cap equities, bonds issued by the same companies may be used to gauge the performance of the U.S. corporate bond market.

An index comprising bonds issued by S&P 500 companies could be used to provide a comparison between the equity and bond markets, given that a significant portion of the constituents of the S&P 500 Bond Index are also members of the S&P 500. 1 Furthermore, the fact that the constituents are issued by the household names of the S&P 500, which are already familiar to the investing community, allows for a higher degree of transparency and measurability in the opaque bond market, features that should be evaluated as part of the characteristics a good benchmark should possess.2

Against that conceptual backdrop, we introduce the recently launched S&P 500 Bond Index, a corporate bond counterpart of the S&P 500. In this paper, we demonstrate that the S&P 500 Bond Index exhibits characteristics and systematic risk factor exposures that are similar to those of existing broad-based, investment-grade corporate bond indices, and that the index can be effectively used to measure the performance of the sector. Furthermore, our analysis shows that the S&P 500 Bond Index has consistently delivered a higher risk/reward ratio than its peer indices, regardless of the measurement horizon.

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1Based on over 20 years of back-tested data, at each monthly rebalance, approximately 255 companies that are in the S&P 500 issue debt. As of July 31, 2015, approximately 430 of the S&P 500’s members have debt issuances, totaling around USD 3 trillion in debt outstanding.

2The CFA Institute curriculum identifies the following as characteristics of a good benchmark:

  • Unambiguous
  • Investable
  • Measurable
  • Appropriate
  • Reflective of current investment opinions
  • Specified in advance

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