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TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

Why Does the S&P 500 Matter to Hong Kong?

FAQ: iBoxx ESG Index Series

Introducing the S&P/ASX 200 High Dividend Index

Navigating Dividend Yield in the Hong Kong Market: The S&P Access Hong Kong Low Volatility High Dividend Index

TalkingPoints: Finding Resilience amid Uncertainty: A Low Volatility High Dividend Approach for the A-Share Market

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to offer liquid and tradable exposure to dividends and low volatility, two well-known risk factors that have delivered risk premium in the China A-share market in the past.

The two factors are combined through sequential dividend and low volatility screens. Companies exhibiting high dividend yield may fall in a “dividend trap,” since high dividend yield can be caused by decreasing stock prices rather than increasing dividend payments. Overlaying a low volatility screen on a high dividend portfolio may help to eliminate the dividend trap, resulting in improved absolute and risk-adjusted returns.

Since inception, the index has shown robust return, lower risk, reduced drawdown and cheaper valuation than its benchmark. The index may be appealing to those who wish to maintain equity exposure during turbulent market environments or those who are interested in increasing equity exposure but have limited risk appetite.

Uncertainty has been a common theme for the China equity market since 2021, amid worries over economic slowdown. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide a defensive and resilient solution for investors to ride through this challenging period.

1. How does the index work?

The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index is designed to have significant large-cap and high dividend exposure while limiting volatility. Index construction starts from the S&P China A Domestic LargeCap, which consists of the top 70% of stocks by float market capitalization in the China A market. As of Dec. 31, 2023, the S&P China A Domestic LargeCap had 610 constituents. First, the top 100 stocks with the highest yields are selected. After that, volatility screening is applied to eliminate the 50 most volatile stocks. To maximize dividend exposure, the remaining 50 names are weighted by dividend yield. The index rebalances semiannually in January and July.

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Why Does the S&P 500 Matter to Hong Kong?

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Sue Lee

Director, APAC Head of Index Investment Strategy

S&P Dow Jones Indices

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

Executive Summary

The S&P 500® is a renowned benchmark for large-cap U.S. equities.  The index reflects approximately 80% coverage of investable market capitalization in the U.S. equity market and includes 500 leading companies, many of which are the world’s largest and most recognizable companies with a global reach of operations, customers and revenue sources.  As of the end of 2022, USD 11.4 trillion was indexed or benchmarked to the S&P 500, with indexed assets making up approximately USD 5.7 trillion of this. As a consequence of an increasing popularity and scale of S&P 500-related products, including index funds, exchange-traded funds (ETFs) and listed derivatives such as futures and options, the typical cost and barriers to entry for S&P 500-linked investments have fallen over time.

In this paper, we examine the S&P 500 from the perspective of a Hong Kong-based investor, including:

  • The relevance of the U.S. in the global economy and global equity markets;
  • Comparison of the S&P 500 to the leading large-cap equity benchmark in Hong Kong;
  • Complementary aspects of an S&P 500-linked investment for a broad-based Hong Kong equity portfolio; and
  • The differences between the S&P 500 and other indices or active portfolios tracking U.S. equities.

The Size and Relevance of the U.S.

The U.S. equity market represents a significant portion of the global economy and equity opportunity set.  Exhibit 1 shows the relative sizes of gross domestic product (GDP) along with equity market capitalization for the U.S., China, Hong Kong and the rest of the world.  When Hong Kong equity investors make choices among countries, over 60% of their opportunity set is composed of U.S. stocks.

Why Does the S&P 500 Matter to Hong Kong?: Exhibit 1

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FAQ: iBoxx ESG Index Series

Company Background

  1. Who is S&P Dow Jones Indices (S&P DJI), and how did iBoxx become part of the S&P DJI brand? S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. Through the merger with IHS Markit, the iBoxx brand became part of S&P DJI, bringing with it the widely recognized fixed income benchmarks across corporate credit, tradeable and sovereign bond indices.
Sustainability at S&P DJI

S&P DJI has been a pioneer in environmental, social and governance (ESG) indexing for 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from broad-based sustainability and low-carbon climate approaches to thematic strategies.

  1. Who is S&P DJI’s ESG data provider? S&P Global, a parent company of S&P DJI, provides the data that powers S&P DJI’s globally recognized equity and fixed income indices. iBoxx also collaborates with external partners to leverage a multitude of ESG datasets to fulfill specific client demands.
iBoxx ESG Indices
  1. What is the iBoxx ESG Index Series? The iBoxx ESG Index Series is a set of market-capitalization-weighted indices that target securities meeting specific sustainability criteria on corporate bond indices. The index series includes suites across the following two ranges:
  • iBoxx Corporates SRI Screened
  • iBoxx Corporates ESG

    1. Why was the iBoxx ESG Index Series created? The iBoxx ESG Index Series was launched to provide an ESG-oriented and investable expansion of leading market benchmarks, such as the iBoxx corporate bond indices across currencies, including the euro (EUR), U.S. dollar (USD) and pound sterling (GBP), and across the investment grade and high yield universes.
    1. What indices are in the iBoxx ESG Index Series? The iBoxx index series consists of the following index families:
  1. iBoxx USD Corporates SRI Screened
  2. iBoxx EUR Corporates SRI Screened
  3. iBoxx GBP Corporates SRI Screened
  4. iBoxx USD High Yield Corporates Developed Markets SRI Screened
  5. iBoxx EUR High Yield Corporates SRI Screened
  6. iBoxx USD Corporates ESG
  7. iBoxx EUR Corporates ESG
  8. iBoxx GBP Corporates ESG
  9. iBoxx USD High Yield Developed Markets Corporates ESG
  10. iBoxx EUR High Yield Corporates ESG

    11. Each index family includes a comprehensive suite of subindices spanning across maturities, ratings and sectors. Further indices or index families may be available in the future.

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Introducing the S&P/ASX 200 High Dividend Index

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Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones Indices

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Introduction

The S&P/ASX 200 High Dividend Index seeks to measure the performance of 50 companies with the highest 12-month forecast dividend yield from the S&P/ASX 200.  From July 2011 to December 2023, the index had an average trailing 12-month dividend yield of 5.6% and an annual excess return of 2.2% compared with the S&P/ASX 200.

The Australian equity market is well known for its high dividend yield and well-cultivated dividend culture.  With over AUD 5 billion AUM in exchange-traded products (ETPs), dividend income has become one of the most popular factor strategies in Australia.

However, strategies chasing the highest-yielding stocks could be vulnerable to “dividend traps.”  High dividend yield may come from decreasing stock prices rather than increasing dividend payments.  In addition, selecting stocks based on historical dividend payments may not reflect a company’s prospects.

The S&P/ASX 200 High Dividend Index seeks to mitigate common risks faced by high dividend yield strategies using two tactics.  First, it applies momentum screens.  Excluding stocks with low price momentum could avoid high-yield stocks driven by deteriorating prices, thus may help to eliminate the dividend trap.  Second, it uses forecast dividend data.  Selecting stocks based on 12-month forecast dividend data that is forward-looking may help to reflect the latest market expectations on a company’s future dividend payments.

Over the 12-year back-tested period, the S&P/ASX 200 High Dividend Index has shown significant outperformance, with higher dividend yield and cheaper valuation than the broad market benchmark.  For market participants seeking high yield and diversification benefits, the S&P/ASX 200 High Dividend Index could help to complement broad market allocation as well.

Index Construction

First, starting from the S&P/ASX 200 universe, all A-REITs and stocks without a positive 12-month forecast dividend yield are excluded.  Second, eligible stocks ranked in the bottom 10% by momentum value are screened out.  Finally, the 50 constituents with the highest 12-month forecast dividend yield are selected.

To balance between the index yield and index capacity, the 50 selected names are weighted by the product of the 12-month forecast dividend yield and the float market capitalization.  To avoid stock concentration risk, the weight of each stock within the index is capped at a minimum of 10% or five times the stock’s weight in the index universe.  In terms of sector diversification, each sector can have maximum of 15 stocks, and its weight cannot exceed the sector weight in the index universe plus 10%.  The index is rebalanced semiannually in January and July.

Introducing the S&P/ASX 200 High Dividend Index: Exhibit 1

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Navigating Dividend Yield in the Hong Kong Market: The S&P Access Hong Kong Low Volatility High Dividend Index

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Jason Ye

Director, Factors and Thematics Indices

S&P Dow Jones Indices

Introduction

Amid the prolonged decline in the Hong Kong equity market spanning from 2020 to 2023, investors faced formidable challenges navigating the landscape of listed stocks in Hong Kong.  However, during this turbulence, a strategy that combines high dividends with a low volatility screen emerged as a strong performance generator.  S&P Dow Jones Indices (S&P DJI) has been at the forefront of integrating low volatility and high dividend factors since 2012, when we launched the first index of its kind, the S&P 500® Low Volatility High Dividend Index.  In previous research studies like "The Beauty of Simplicity: The S&P 500 Low Volatility High Dividend Index" and "Blending Low Volatility with Dividend Yield in the China A-Share Market,"  S&P DJI's research team underscored the efficacy of integrating these factors in both the U.S. and China A-Shares markets.  Building upon this foundation, our index offering extends to the Hong Kong-listed stock market.

In this paper, we introduce the S&P Access Hong Kong Low Volatility High Dividend Index, a pioneering index that tracks 50 high dividend yield stocks within the S&P Access Hong Kong Index universe.  Through our exploration, we shed light on the historical performance and characteristics of this index.

Empirical Study

In a related paper, “Exploring China A-Share Dividends and High-Yield Strategy Performance,” we performed an empirical study of quintile analysis on hypothetical portfolios sorted by dividend yield in the China A-Shares market.  We extended the same framework to conduct an analysis of stocks in the Hang Seng Composite Index (HSCI) universe.

We sorted dividend-paying stocks according to their trailing 12-month dividend yield and allocated them to five hypothetical portfolios based on dividend yield, ranging from highest to lowest, with non-dividend-paying companies assigned to a separate sixth portfolio.  We rebalance the hypothetical portfolios semi-annually at the end of January and July.

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