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High Yield and Growing Dividends without Sector Bias: The S&P Sector-Neutral High Yield Dividend Aristocrats

S&P 500 Dividend Aristocrats: The Importance of Stable Dividend Income

The Relevance of U.S. Equities to Japan

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index

ETFs in Insurance General Accounts – 2023

High Yield and Growing Dividends without Sector Bias: The S&P Sector-Neutral High Yield Dividend Aristocrats

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George Valantasis

Associate Director, Factors and Dividends

S&P Dow Jones Indices

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Rupert Watts

Head of Factors and Dividends, Product Management

S&P Dow Jones Indices

The desire for yield and equity participation has led to a substantial increase in demand for passively managed dividend strategies over the past decade.  Common strategies include dividend indices that tend to have large sector weights versus their underlying benchmark—but few, if any, are designed to be sector neutral.  With this in mind, S&P DJI launched the S&P Sector-Neutral High Yield Dividend Aristocrats (HYDA) in September 2022.  This index attempts to strike a balance between dividend growth and higher relative yield, while seeking to mirror the sector weights of the S&P  Composite 1500®.  In this paper, we review the index’s historical performance characteristics and the following aspects from the index methodology.

  • Incorporating dividend growth: To be eligible for selection, constituents of the S&P Sector-Neutral HYDA must have maintained or increased total dividend per share amounts every year for at least seven consecutive years.  Companies that can do this may be higher quality and exhibit features such as financial discipline or a robust business model that can weather difficult economic environments.  The superior quality metrics versus the benchmark support this notion.

  • A focus on yield: The index selects companies whose indicated annual dividend (IAD) yield is greater than the sector median IAD yield.  This feature of the methodology enhances the overall dividend yield versus the benchmark.  The average dividend yield of the S&P Sector-Neutral HYDA since 2005 is 3.02% versus 1.86% for the S&P Composite 1500. A focus on high dividend yield may also explain the value exposure of the index versus the benchmark.
  • Sector neutrality: Sector neutrality in the dividend space is a key differentiator, as most dividend strategies tend to have large sector biases and underweight secular growth sectors like Information Technology, Communication Services and Health Care. Sector neutrality is achieved by adjusting the sector weights to mirror the sector weights of the S&P Composite 1500.  This approach ensures the index is diversified across sectors and helps reduce the overall tracking error versus the benchmark.

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S&P 500 Dividend Aristocrats: The Importance of Stable Dividend Income

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Rupert Watts

Head of Factors and Dividends, Product Management

S&P Dow Jones Indices

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Hugo Barrera

Senior Analyst, Factors and Dividends Product Management

S&P Dow Jones Indices

EXECUTIVE SUMMARY

  • Dividends play an important role in generating equity total return. Since 1926, dividends have contributed approximately 32% of total return for the S&P 500, while capital appreciations have contributed 68%.  Therefore, sustainable dividend income and capital appreciation potential are important factors for total return expectations.
  • Companies use stable and increasing dividends as a signal of confidence in their firm’s prospects, while market participants consider such track records as a sign of corporate maturity and balance sheet strength.
  • The S&P 500 Dividend Aristocrats is designed to measure the performance of S&P 500 constituents that have followed a policy of increasing dividends every year for at least 25 consecutive years.
  • The S&P 500 Dividend Aristocrats exhibits both capital growth and dividend income characteristics, as opposed to alternative income strategies that may be pure yield or pure capital-appreciation oriented.
  • Over the long term, the S&P 500 Dividend Aristocrats exhibited higher returns with lower volatility compared with the S&P 500, resulting in higher risk-adjusted returns.
  • As of 2023, S&P 500 Dividend Aristocrats constituents included 66 securities, diversified across 10 sectors (see Exhibit 13 in the Appendix).
    • The constituents have both growth and value characteristics.
  • The composition of the S&P 500 Dividend Aristocrats contrasts with that of traditional dividend-oriented benchmarks that have a steep value bias and have high exposure to the Financials and Utilities sectors. At each rebalancing, a 30% sector cap is imposed to ensure sector diversification.
  • The S&P 500 Dividend Aristocrats follows an equal weight methodology.
    • This treats each company as a distinct entity, regardless of market capitalization.
    • This also eliminates single stock concentration risk.

INTRODUCTION

Dividends have interested market participants and theorists since the origins of modern financial theory. As such, many researchers have investigated the various topics related to dividends and dividend-paying firms. Previous studies by S&P Dow Jones Indices have shown that over a long-term investment horizon, dividend-paying constituents of the S&P 500 have outperformed the non-payers of dividends and the overall broad market on a risk-adjusted basis.

In recent years, the increasing amount of academic and practitioner research demonstrates that dividend yield is a compensated risk factor and has historically earned excess returns over a market-cap-weighted benchmark. When combined with other factors such as volatility, quality, momentum, value and size, dividend yield strategies can potentially offer exposure to systematic sources of return.

In this paper, we show that dividend yield is an important component of total return. We also highlight pertinent characteristics of the S&P 500 Dividend Aristocrats, an index that seeks to measure the performance of the S&P 500 constituents that have increased their dividend payouts for 25 consecutive years. We show that the S&P 500 Dividend Aristocrats has historically possessed desirable risk/return characteristics, offering higher risk-adjusted returns and downside protection than the broad-based benchmark. In addition, our analysis shows that the S&P 500 Dividend Aristocrats is sector diversified and displays growth and value characteristics.

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The Relevance of U.S. Equities to Japan

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

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Cristopher Anguiano

Senior Analyst, U.S. Equity Indices

S&P Dow Jones Indices

Executive Summary

U.S. equities represent a significant portion of the global equity opportunity set, with characteristics that offer potential diversification benefits for Japanese markets.  In this paper, we:

  • Outline the global relevance of the U.S. equity market;
  • Illustrate the U.S. equity market’s distinct sector exposures;
  • Demonstrate how the inclusion of U.S. equities might improve risk and returns; and
  • Summarize the record of actively managed equity funds in comparison to S&P DJI’s flagship equity benchmarks.

The Size and Relevance of the U.S.

The U.S. equity market represents a sizeable portion of the global equity opportunity set.  Exhibit 1 shows that U.S.-domiciled companies accounted for 59.3% of the float market capitalization of the global equity universe at the end of June 2023, nearly nine times larger than the Japanese equity market (6.6%).  

The Relevance of U.S. Equities to Japan: Exhibit 1

Beyond U.S. Large Caps: The S&P 1500®

Launched in 1995, the S&P Composite 1500®—otherwise known as the S&P 1500—is designed to measure the performance of the U.S. equity market.  The S&P 1500 is a float market capitalization-weighted combination of three component indices: the S&P 500®, S&P MidCap 400® and S&P SmallCap 600®, covering the large-, mid- and small-cap U.S. equity segments, respectively.  Each index follows the same comprehensive, rules-based and transparent methodology, which has historically helped the S&P 1500 to avoid less liquid, lower priced and lower quality stocks.

Although the large-cap segment represents a sizeable portion of the U.S. equity market—on average, the S&P 500 accounted for over 80% of the U.S. stock market, historically—the breadth and depth of the U.S. equity market means that smaller U.S. size segments are as large as some countries’ equity markets.  For example, taken as standalone countries, the S&P MidCap 400 and S&P SmallCap 600 would have been the 4th and 12th largest countries in the S&P Global BMI, respectively, at the end of 2022.

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More Equal than Others: 20 Years of the S&P 500 Equal Weight Index

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Grace Stoddart

Quantitative Associate, Index Investment Strategy

S&P Dow Jones Indices

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Tim Edwards

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Davide Di Gioia

Director, Index Investment Strategy

S&P Dow Jones Indices

Summary

It is over 20 years since S&P Dow Jones Indices launched the S&P 500 Equal Weight Index; since then, its live performance has attracted both academic interest and investor capital in related products.  To mark the anniversary, we re-examine the index’s potential as a benchmark for actively managed U.S. equity mutual funds.  Using 20 years of live performance, we show: 

  • The annual excess returns of the average actively managed Large-Cap Core U.S. equity fund (relative to the S&P 500) were correlated to those of the S&P 500 Equal Weight Index.
  • Over the long term, in every major category, nearly all actively managed domestic U.S. equity funds underperformed the S&P 500 Equal Weight Index.
  • These results would not be substantially altered after accounting for the typical frictions that might be associated with a passive investment tracking the S&P 500 Equal Weight Index.

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index: Exhibit 1

Introduction

Offering a simple alternative to the standard capitalization-weighted approach for U.S. blue-chip equities, the S&P 500 Equal Weight Index began publication just over 20 years ago on Jan. 8, 2003.  The index’s performance since launch has been notable, with a total return not only higher than its large-cap benchmark index, but also higher than S&P DJI’s benchmarks for mid- and small-cap U.S. equities, as well as both growth and value indices based on the S&P 500 (Exhibit 2).

More Equal than Others: 20 Years of the S&P 500 Equal Weight Index: Exhibit 2

This outperformance offers a challenging perspective on the results reported in S&P Dow Jones Indices’ SPIVA® Scorecards, which have consistently shown that a high proportion of actively managed U.S. equity mutual funds underperform capitalization-weighted benchmarks.  “Challenging” because—as we shall illustrate—actively managed large-cap equity funds might be expected to benefit during periods when equal-weight indices outperform cap-weighted indices. 

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ETFs in Insurance General Accounts – 2023

Introduction

In 2022, the amount of exchange-traded funds (ETFs) held by U.S. insurance companies in their general accounts dropped 23.5% (or USD 11.2 billion) to USD 36.6 billion.  This represents the first substantial drop in ETF assets since insurance companies started buying ETFs in 2004.  However, two factors complicate analyzing the drop in ETF assets.  The first is the unusual bear market we had in 2022, with both equity and fixed income markets showing sharp declines—the S&P 500® dropped 19.4% and the S&P U.S. Investment Grade Corporate Bond Index dropped 14.3%.  In 2022, insurers withdrew USD 4.1 billion from ETFs, so valuation declines explain approximately two-thirds of the drop in AUM.  Also in 2022, two Mega insurers decided to exit all public equites, including ETFs.  This represented USD 3.5 billion of all the withdrawals.  Excluding these two companies from the analysis, insurer ETF AUM declined by 16.5%—or in line with market results.

Even though most U.S. insurer assets are in Fixed Income, insurers typically invested in Equity ETFs.  This continued to be the case, even with the large amount of Equity ETFs sold by the two Mega companies.  Outside of these two companies, we saw flows into Equity ETFs and away from Fixed Income ETFs.

In our eighth annual study of ETF usage in U.S. insurance general accounts, we also analyzed the trading of ETFs by insurance companies.  For the second consecutive year, trade volume declined; however, the overall trend remains positive, with 2022 trade volume increasing 350% over 2015 trade volume.

Holding Analysis

Overview

As of year-end 2022, U.S. insurance companies invested USD 36.6 billion in ETFs.  This represented only a fraction of the USD 6.5 trillion in U.S. ETF AUM and the USD 7.9 trillion in invested assets of U.S. insurance companies.  Exhibit 1 shows the growth of ETFs by U.S. insurance companies over the past 18 years.

ETFs in Insurance General Accounts – 2023 : Exhibit 1

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