In This List

S&P High Yield Dividend Aristocrats: A Practitioner's Guide

Making the Case for the S&P Biotechnology Select Industry Index

Seeking Stable Income: The S&P 500® Quality High Dividend Index

FAQ: S&P Fair Value Indices

The Benchmark that Changed the World: Celebrating 20 Years of the Dow Jones Sustainability Indices

S&P High Yield Dividend Aristocrats: A Practitioner's Guide

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Qing Li

Director, Global Research & Design

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Bill Hao

Director, Global Research & Design

INTRODUCTION

In a market environment with low yields and potential interest rate cuts, as seen in the U.S. in 2019, yield-seeking investors may become more interested in equity dividend yield strategies.  Dividend strategies could satisfy investors’ needs in several ways, including higher dividend income, favorable risk-adjusted returns, lower volatility, and more downside protection in bearish market environments.  In this paper, we look at the S&P High Yield Dividend Aristocrats and its characteristics, risk/return profile, and performance attribution.

Two common strategies for dividend investing are high dividend yield and dividend growth.  To capture the premium of a dividend growth strategy, S&P Dow Jones Indices launched the S&P High Yield Dividend Aristocrats in November 2005.  The index is designed to track a basket of stocks from the S&P Composite 1500® that consistently increased their total dividends per share every year for at least 20 consecutive years.[1]  The index universe covers large-, mid-, and small-cap stocks in the U.S. equities market.

The outperformance of the S&P High Yield Dividend Aristocrats has historically been attributed to stock selection rather than sector allocation.  Moreover, the index constituents tend to have the high-quality characteristics of higher operating profitability and more conservative investment growth than the overall market.  From business operations and financial perspectives, high-quality fundamentals form the foundation for sustainable dividend increases.

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Making the Case for the S&P Biotechnology Select Industry Index

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Tianyin Cheng

Senior Director, Strategy Indices

Biotechnology has famously improved our quality of life for decades.  It addresses many global health problems, such as infectious and age-related diseases.  Investors can see the potential for significant gains in this sector, due to its potential for new sources of return and diversification of risk.  However, this also comes with the possibility of losses.  The S&PBiotechnology Select Industry Indexs “basket” approach to allocation may provide a solution for those concerned with risk.  It aims to provide diverse exposure to listed biotechnology (biotech) companies across large-, mid-, small-, and micro-cap companies in the U.S.

WHY INVEST IN BIOTECHNOLOGY? 

Based in genetic analysis and engineering, biotech firms primarily engage in the research, development, manufacturing, and, to a lesser extent, marketing of healthcare products based on genetic analysis and engineering.  Biotech has a few important industry-specific characteristics. 

  1. High Investment and Long Waiting Period: It can take as much as a decade to get a new drug from the test tube to the pharmacy shelf.  During this lead time, biotech companies may not generate revenue, and hence are highly dependent on venture capital funds and trading publicly on stock exchanges to fund research and development. 
  2. High Risk: The discovery of new drugs is an expensive, slow, and risky business. Investors need to be aware that the risk of failure of new drugs to reach approval is exceptionally high.  Typically, 85%95% of all new drugs fail to reach approval.[1]  Historically, many biotech companies have experienced serious losses after failing critical research or drug trials.
  3. High Yield: During the research phase, biotech companies tend to be unprofitable. However, once a new breakthrough drug is discovered that proves to be successful in treating diseases, it has the potential to be highly (or exponentially) profitable.  Then, the high yield is protected by adequate IP or copyright to ensure that the company can appropriate its research and design results and reduce the likelihood of imitation by competitors.The rewards and risks of investing in biotech stocks can be significant.  Key factors to consider include the research pipeline, stage of research and clinical trials, secure sources of future financing, regulatory changes, and mergers & acquisitions. 

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Seeking Stable Income: The S&P 500® Quality High Dividend Index

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

Amid 2019’s volatile market environment characterized by escalated trade disputes and fears of economic recession, many market participants started the year worrying about rising rates—only to see them decline.  In turbulent times, a focus on quality stocks with high dividend yields may present a compelling investment solution for market participants seeking stable income.

The S&P 500 Quality High Dividend Index seeks to provide just such a solution—it selects stocks that rank within the top 200 of the S&P 500 by quality score and dividend yield (see Exhibit 1).  This order-indifferent approach ensures extensive and balanced exposure to both quality and dividend yield.  Constituents are equally weighted and rebalanced semiannually.[1]

WHAT IS QUALITY?

S&P Dow Jones Indices defines quality as a combination of profit generation, earnings quality, and financial robustness (see Exhibit 2).  Together, these traits generally shield companies from the volatility of the economic cycle, making them slightly more immune to downturns.

Historically, high-quality stocks have delivered outperformance in the long run and provided downside protection during down markets (see Exhibits 3 and 4).

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FAQ: S&P Fair Value Indices

U.S.-registered mutual funds with global holdings can more precisely explain artificial tracking error between a benchmark index and fund net asset value (NAV) through use of the S&P Fair Value indices.

1. What are the S&P Fair Value Indices? The S&P Fair Value Indices incorporate adjustments to company share prices based on information available after the close of local exchanges. These fair value adjustments are calculated at the U.S. market close and are then used in the daily calculation of the S&P Fair Value Indices.

2. What are some key benefits of using the indices? U.S. mutual funds that hold foreign securities may have tracking error between benchmark indices and fund valuations, since NAVs include adjustments based on market movement outside of regular local trading hours. The S&P Fair Value Indices offer an explanation of this tracking error by incorporating these market movements into the underlying share prices of the index, and may act as a secondary benchmark for a given fund. As illustrated in Exhibit 1, period returns can vary widely between standard benchmarks and their fair value counterpart.

3. How are the fair value adjustments reflected in the indices? The indices are calculated using fair value adjustment factors applied on an individual basis to each stock in the index. The price for each stock is multiplied by the fair value adjustment for that stock to arrive at a fair value price measured as of the close of trading on the New York Stock Exchange using the 4:00 p.m. EST WM/Reuters exchange rate.

4. What is the source of the fair value adjustment factor? The factors are provided by Virtu Financial, Inc. a pricing service that calculates fair value adjustments. Virtu’s fair value pricing service was previously called ITG Fair Value Model.

5. Are any other changes made to the indices? The index uses the composition effective at the next day’s open (i.e., the adjusted close data). The index is then calculated in the same fashion as the underlying index.

6. What S&P Fair Value Indices are available? Exhibit 2 includes a sampling of our current S&P Fair Value IndicesS&P Dow Jones Indices can calculate fair value versions of any international equity benchmark based on client needs.

For a full list of available indices, please refer to the S&P Fair Value Indices Parameters document.

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The Benchmark that Changed the World: Celebrating 20 Years of the Dow Jones Sustainability Indices

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

INTRODUCTION

The year 1999 gave the world the euro, The Matrix, and the world’s first ever global sustainability benchmark—the Dow Jones Sustainability Index (DJSI).  The product of a landmark collaboration between S&P Dow Jones Indices and SAM1 (now RobecoSAM), the DJSI pioneered sustainable indexing and has shaped corporate sustainability practices ever since.2  To commemorate the 20th anniversary of the DJSI in 2019, we reflect on its origins, its impact on the market, and the possible future of the sustainable investing landscape.  Inclusion in the DJSI is seen as a badge of honor by sustainability champions around the world.  Perhaps no other benchmark has had as profound an impact on the behavior of companies, as they seek to secure a coveted spot in the world-renowned DJSI World each year.  Today, there are over 37,000 sustainable indices available worldwide,3 and with a 60% increase in the number between 2017 and 2018 alone, the industry is rapidly transforming.4  Amid this proliferation of environmental, social, and governance (ESG) benchmarking tools, the DJSI continues to make waves as the evolving global standard for benchmarking corporate sustainability performance, even two decades later.

1700s-1970s: THE ORIGINS OF RESPONSIBLE INVESTING

The notion of responsible investing is practically as old as investing itself. Records date back to the 18th century, when faith-based groups such as the Quakers and the Methodists provided guidance on “sinful” investments to avoid.  To this day, faith-based strategies like Shariah-compliant investing are offered within the broader sustainable investment framework.  However, the modern socially responsible investing (SRI) movement, as we know it, took off in the 1960s and 1970s, for example, with the boycott, divestment, and sanctions against South African companies during the era of apartheid.

Similar measures were adopted during the Vietnam War, culminating in the establishment of the first ethical investment vehicle, the Pax World Balanced Fund, in 1971.[1]  The mutual fund, which avoided investments in the supply chains of the controversial tactical herbicide Agent Orange, offered a channel for values-driven investors seeking to redirect their investments on the basis of pacifist moral principles.  Together, these movements paved the way for a generation of socially conscious investors seeking to affect social and political change, underscoring the ambition of “putting one’s money where one’s mouth is.”

By the 1980s, SRI had become fairly standardized in removing “sin stocks,” such as alcohol, tobacco, weapons, and nuclear energy, from investment portfolios.  Fundamentally about values, SRI is driven by the desire to align one’s investments with one’s beliefs.  But as modern portfolio theory suggests, excluding stocks from the opportunity set reduces potential returns.  While popular with values-driven investors, SRI thus did not gain widespread traction among mainstream investors and was left relegated to those willing to put their beliefs before their returns.  However, the idea that responsible companies are not only morally superior, but are also superior in terms of financial performance was slowly starting to surface.  In the early 1970s, the New York-based journalist Milton Moskowitz published lists of “responsible” and “irresponsible” companies, tracking their performance against the stock market.  In 1973, he wrote in the New York Times, “I do harbor the suspicion that socially insensitive management will eventually make enough mistakes to play havoc with the bottom line.”6  While his thinking underpinned many of the ideas behind corporate social responsibility (CSR), it would remain largely disconnected from the typical investment process until ESG investing later became widespread—in part, due to the launch of the DJSI.

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