S&P DJI recently launched a new family of indices known as the S&P Quality FCF Aristocrats which includes the S&P 500^® Quality FCF Aristocrats^® Index and the S&P Developed Quality FCF Aristocrats Index. A more comprehensive introduction to this family of indices can be found in this blog post.

Gaining insights into the historical performance of factor strategies across various macroeconomic environments is essential for risk mitigation and informed investment decisions.  In this blog, we will begin by analyzing the performance of these two newly launched indices across different economic regimes. Following that, we will compare the performance of the S&P 500 Quality FCF Aristocrats Index with that of another Aristocrats-branded index, the S&P High Yield Dividend Aristocrats, across the same four economic scenarios.

Macroeconomic Framework¹

To assess performance across different economic environments, we use a framework that defines four distinct regimes based on whether growth² and inflation³ are rising or falling. These regimes are organizing into four quadrants which are illustrated in Exhibit 1.

Considering the longer back-tested history available for the U.S. market compared to other developed markets, we present two distinct time horizons in our analysis (see Exhibit 2). The first time horizon spans 282 calendar months from May 31, 2001, to Oct. 31, 2024 for U.S. markets, while the second covers 222 calendar months from May 31, 2006, to Oct. 31, 2024, for developed markets. Exhibit 2 displays the number of months and relative frequency across each regime.

Performance Across Growth and Inflation Regimes

The historical risk/return characteristics of the S&P Quality FCF Aristocrats Indices and their respective benchmarks across the four economic regimes are illustrated in Exhibit 3. Historically, all the indices presented demonstrated highest absolute returns and risk-adjusted returns in the Rising Growth and Falling Inflation regime, followed by the Rising Growth and Rising Inflation regime. Conversely, these indices experienced much lower returns in the Falling Growth and Falling Inflation regime, with the worst returns—often negative—occurring in the Falling Growth and Rising Inflation regime.

Excess Returns⁴ in Four Economic Regimes

In this section, we analyze the macroeconomic performance of the S&P Quality FCF Aristocrats Indices in terms of their excess returns (ER) relative to their benchmarks (see Exhibit 4).

The S&P 500 Quality FCF Aristocrats Index consistently outperformed the S&P 500 in a Falling Growth environment, regardless of inflation trends. In the Rising Growth and Falling Inflation regime, its performance was comparable to that of the S&P 500. However, in the Rising Growth and Rising Inflation regime, it underperformed. This behavior indicates that the S&P 500 Quality FCF Aristocrats Index exhibits strong defensive characteristics whilst still meaningfully participating in market upside.

The S&P Developed Quality FCF Aristocrats Index consistently outperformed the S&P Developed LargeMidCap index by a wide margin in a Falling Growth environment, regardless of inflation trends. In the Rising Growth regime, its performance was slightly better than its benchmark. The results indicate that the S&P Developed Quality FCF Aristocrats index outperformed S&P Developed LargeMidCap in all economic regimes, meaning it was defensive in down markets while keeping pace strongly in up markets.

Comparison with the S&P High Yield Dividend Aristocrats

In a previous blog, we compared the S&P 500 Quality FCF Aristocrats Index with the S&P High Yield Dividend Aristocrats, demonstrating that these two indices provide differentiated exposure and track companies with distinct profiles. Now, let's examine how they perform across the defined macroeconomic regimes.

Overall, the indices have differentiated exposure across these regimes. The S&P High Yield Dividend Aristocrats achieved its highest excess returns during the Falling Growth and Rising Inflation environment. In contrast, the S&P 500 Quality FCF Aristocrats led the way during both Falling Growth regimes, regardless of the inflation regime. However, both indices underperformed relative to the broad market during the Rising Growth and Rising Inflation regime.

In conclusion, the S&P Quality FCF Aristocrats Indices have historically outperformed during periods of falling economic growth, regardless of the inflation regime. In times of rising growth, both indices performed in line with the benchmark during falling inflation; however, the S&P 500 Quality FCF Aristocrats lagged when inflation was rising. Furthermore, our analysis shows that the S&P 500 Quality FCF Aristocrats offer differentiated exposure compared to the S&P High Yield Dividend Aristocrats, highlighting their potential as complementary tools.

¹ Hao, Wenli Bill and Rupert Watts, "A Historical Perspective on Factor Index Performance across Macroeconomic Cycles," S&P Dow Jones Indices LLC, Nov. 14, 2024.

² Rising growth is defined as a positive monthly change in the U.S. Composite Leading Indicator (CLI) compared to the previous month, while falling growth is defined as a negative monthly change.

³ Rising inflation occurs when the three-month average of U.S. Consumer Price Index (CPI) exceeds that of three-year moving average, while falling inflation occurs when falling below.

⁴ Excess return measures how much the average monthly total return of each index exceeds that of its corresponding benchmark in each regime.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

In 2024, open interest in futures tracking the iBoxx iShares $ High Yield Corporate Bond Index and iBoxx iShares $ Investment Grade Corporate Bond Index rose considerably. Open interest in futures referencing the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index also increased following its June 17, 2024, launch.

For the iBoxx iShares $ High Yield Corporate Bond Index, 2024 open interest expanded by 245% to USD 414.9 million, while the iBoxx iShares $ Investment Grade Corporate Bond Index realized growth of 238% to USD 267.4 million in 2024. This occurred alongside trading volumes of USD 12.4 billion and USD 10.1 billion, respectively, for futures tied to the iBoxx iShares $ High Yield Corporate Bond Index and iBoxx iShares $ Investment Grade Corporate Bond Index throughout the year.

Futures tracking the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index have traded USD 466.3 million in notional value since their June 17, 2024, launch. Average daily open interest initially rose from USD 3.5 million in July to a peak of USD 12.8 million in September, moderated to USD 9.8 million in October and USD 10.3 million in November, and ended the year at USD 5.9 million in December.

The growth in iBoxx-linked futures open interest highlights the uptake of these indices within the tradable credit ecosystem, while the launch of futures tracking the iBoxx $ Liquid Emerging Markets Sovereigns & Sub-Sovereigns Index indicates demand for additional measures and trading tools across credit market segments. As index-based solutions evolve, these developments underscore an ongoing shift toward broader, more flexible mechanisms for managing and accessing credit exposures.

For more information, please see 2024 Fixed Income Review: Elevated Yields and Increase in Index-Linked Futures Trading.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

It is clear that the rapid rise of the 10-year U.S. Treasury yield could have significant implications for active bond manager performance, as well as bond market volatility dynamics. But how might this affect the equity market? Another important role of U.S. Treasury yields is to act as a risk-free rate to compare to the market return, the excess return of which is known as the equity risk premium.

Coupled with rising yields and continuous record highs for the stock market, Exhibit 1 shows that the S&P 500^® equity risk premium, measured here as the difference between the S&P 500 trailing 12-month earnings yield versus the 10-year U.S. Treasury yield, has plummeted over the past year, most recently entering negative territory. The last time the equity risk premium was below zero was following the burst of the Tech bubble during the early 2000s.

While the equity risk premium may indicate that equities seem relatively expensive compared to bonds, we do caveat that as of Jan. 21, 2025, Q4 2024 S&P 500 earnings season has started off on a solid note, particularly among the big banks, and if earnings growth continues, that might help to support current valuations.

We can also analyze equities and bonds from an income lens by comparing the market's dividend yield to 10-year U.S. Treasury yields. Exhibit 2 illustrates that the yield on the 10-year U.S. Treasury of 4.6% has significantly outpaced the S&P 500 trailing 12-month dividend yield, which has declined over the past couple of decades to 1.3% as of Jan. 17, 2025.

Bonds may seem relatively better positioned from a valuation and income vantage point, but their diversification potential is also interesting to examine. We observe in Exhibit 3 that correlations between equities and bonds, as measured by The 500™ and S&P U.S. Treasury Bond Current 10-Year Index, have recently turned negative. After witnessing positive correlations for most of 2024, this reversal, if sustained, might be indicative of a tailwind for enhanced risk-adjusted performance for combinations of both asset classes.

As we enter a new presidential regime, filled with many uncertain variables, we may not know the future trajectory of bonds or equities, but understanding their historical value, income and diversification characteristics could aid investors to adapt accordingly.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Since its launch in July 2022 to year-end 2024, the S&P 500^® Equal Weight ESG Index achieved a cumulative outperformance of 0.86% compared to its benchmark, the S&P 500 Equal Weight Index. Gaining insight into the factors behind this outperformance highlights important aspects of environmental, social and governance (ESG) attributes that function differently from those in market-cap indices like the S&P 500 ESG Index.

To investigate the ESG attributes contributing to the S&P 500 Equal Weight ESG Index's performance, we created hypothetical ESG quintile compositions by count and reconstituted them annually. This was done by ranking the S&P 500 Equal Weight Index's constituents based on their ESG scores and assigning them to one of the five compositions, from highest to lowest ESG score, akin to previous assessments¹ conducted on the S&P 500 ESG Index. The hypothetical equal-weighted performance of these compositions was then calculated and used to create a Brinson-like ESG attribution analysis,² teasing out the importance of ESG score exposures in the performance of the S&P 500 Equal Weight ESG Index.

Exhibit 1 illustrates the results of this analysis, measuring the contribution of ESG quintile weighting and stock selection effects to the S&P 500 Equal Weight ESG Index's excess return relative to the S&P 500 Equal Weight Index since its launch.³ To emphasize the relative impact of ESG quintile weighting and stock selection effects, the exhibit shows the proportion of the total impact, with their absolute values summing to 100% and the actual return impact shown in the labels.

Our findings reveal that the S&P 500 Equal Weight ESG Index's performance was predominantly driven by stock selection effects rather than ESG quintile weighting effects. Specifically, stock selection contributed 2.65% to the index's excess return, while ESG quintile weighting had a negative impact of 1.79%. This resulted in a total cumulative excess return of 0.86%. Of the five ESG quintiles, the ESG quintile weighting effect exceeded the stock selection effect in just one: Quintile 1.

This conclusion contrasts with the performance drivers observed in the S&P 500 ESG Index during the same period, as illustrated in Exhibit 2. The S&P 500 ESG Index achieved a cumulative excess return of 0.91% against the S&P 500, with more than 60% of this excess return driven by ESG quintile weighting effects. ⁴

The varied performance drivers highlight the significant impact that index construction methodologies can have on performance. The S&P 500 Equal Weight ESG Index⁵ can benefit from an approach that emphasizes the selection of companies with higher ESG scores across market capitalizations. This could enable it to tap into the value generated by smaller firms, which can be overlooked in cap-weighted indices.

As the growing emphasis on sustainable investing continues to shape market participants' preferences and the drivers of relative performance in the S&P 500 Equal Weight Index⁶ continue to attract attention, these findings could serve as a crucial reference for market participants looking into this index's ESG variant. For those interested in exploring more about S&P DJI's sustainability-focused indices, additional information is available in the Sustainability Index Dashboard.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

¹ For a thorough description of the hypothetical ESG quintile compositions and the drivers behind the excess return in the S&P 500 ESG Index, see Beyhan, Maya, "Charting New Frontiers," S&P Dow Jones Indices LLC, Sept. 06, 2024.

² For more information on this widely used performance attribution model, see Brinson, Gary P., L. Randolph Hood and Gilbert L. Beebower, "Determinants of Portfolio Performance," Financial Analysts Journal, July-August, 1986.

³ Analysis carried out using Portfolio Analytics on S&P Capital IQ Pro.

⁴ Analysis carried out using Portfolio Analytics on S&P Capital IQ Pro.

⁵ See the S&P Equal Weight ESG Indices Methodology.

⁶ For a thorough overview of the potential sources and drivers of relative performance in the S&P 500 Equal Weight Index, see Ganti, Anu R., Tim Edwards and Hamish Preston, "Worth the Weight," S&P Dow Jones Indices LLC, July 23, 2024.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The S&P U.S. Style Indices underwent their annual rebalancing in December 2024, leading to significant changes in sector exposures. Particularly, the S&P 500 style reclassification led to above-average turnover, as shown in Exhibit 1. While the S&P 500 Growth's turnover was not unusual, the S&P 500 Value's turnover was relatively high compared to the historical average of 23%.

The S&P U.S. Style Indices' methodology aims to divide the market capitalization of the underlying index roughly equally into growth and value indices. Style scores are calculated for each company based on three factors to measure growth and value, as listed in Exhibit 2. The most growth-oriented companies are placed in the growth basket until it represents 33% of the underlying index's market cap. The same applies to the value basket. The remaining 34% form the blended basket, which has similar growth and value traits.

Notably, three of the five largest S&P 500 Growth companies pre-rebalancing—Apple, Microsoft and Amazon (representing 31.3% of the S&P 500 Growth's weight)—moved to the blended basket. These companies migrated due to a decline in their Growth Score: Apple ranked lower in sales growth and earnings growth relative to the underlying index (the broader basket), while Amazon and Microsoft experienced declines in earnings growth and sales growth relative to the growth basket. Only Microsoft ranked lower in momentum relative to the broader basket.

At the sector level, Exhibits 4 and 5 show that the Information Technology and Financials sectors experienced the most significant changes, followed to a lesser extent by Industrials and Consumer Discretionary. For the S&P 500 Growth, Information Technology decreased from 49.7% to 39.9%, while Financials increased from 5.2% to 11.9%. Historically, this index has been Information Technology-heavy, but its Information Technology weight prior to the latest rebalance reached levels not seen in the past 15 years. The Financials weight almost doubled compared to the historical average of 6%.

In contrast, the S&P 500 Value saw its Information Technology weight roughly triple from 7.9% to 24.8%, while its Financials weight decreased from 25.2% to 15.3%. The index currently has its highest Information Technology weight following the rebalance, while its Financials weight dropped to relatively low levels compared to the historical average of 22% over the past 15 years.

Financials companies ranked high in book value to price and earnings to price, but 30% also ranked high in sales growth and momentum. This caused some companies to move from the value index to the blended basket, increasing their weight in the S&P 500 Growth by 4.1% and decreasing their weight in the S&P 500 Value by 6.0%. Additionally, companies that moved from the blended basket to the value basket resulted in a 2.6% weight increase in the S&P 500 Growth and a corresponding decrease in the S&P 500 Value.

The 2024 S&P U.S. Style Indices' annual rebalancing led to significant sector shifts, particularly in the Information Technology and Financials sectors of the S&P 500 Growth and S&P 500 Value. These adjustments highlight the dynamic nature of the style indices and how market conditions can affect their composition, ensuring the indices accurately reflect the evolving market landscape.

The posts on this blog are opinions, not advice. Please read our Disclaimers.