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

The Case for Information Technology Dividend Growers

TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

Talking Points: Capturing the Growth of the Australian Technology Industry

Indexology Magazine: Winter 2020

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

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy 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.[1]

Over the 10-year back-tested period, 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 but limit risk or those who are interested  in increasing equity exposure without increasing risk.

Uncertainty has been a common theme throughout 2019 and rolling into 2020, with escalated risk of Covid-19. The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index may help to provide an alternative for investors to ride through this challenging period.

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The Case for Information Technology Dividend Growers

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Karina Tjin

Analyst, Strategy Indices

It was once thought that companies from the Information Technology sector do not pay dividends.  While this may have been the trend a long time ago, it certainly has not been for the last decade.  Over the past 10 years, within the Information Technology sector of the S&P 500®, 26 companies initiated dividend payments and 59 companies increased their dividends at various points throughout those years, for a total of 376 dividend increases in the sector.

During the same period, with an increasing number of Information Technology companies paying dividends, the contribution to S&P 500 total return by these companies rose from 9.07% in 2009 to 16.33% in 2019 (see Exhibit 1).

This change in the Information Technology sector creates a need to measure the performance of its dividend growers.  To do this, S&P Dow Jones Indices recently launched the S&P Technology Dividend Aristocrats® Index, which seeks to track the performance of Tech companies that have a history of consistently increasing dividends.  

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TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

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Silvia Kitchener

Director, Global Equity Indices, Latin America

When it comes to small-cap equities, profitability matters. Over the past 25 years, the S&P SmallCap 600® has outperformed the Russell 2000 by almost 1.7% on an annual basis. A key driver of this outperformance was the quality bias that comes from the profitability screen that is built into the S&P SmallCap 600. What  happens when that same methodology is applied to small caps  in other markets? 

1. What are the characteristics of small-cap stocks and how have market participants used them traditionally?

An important characteristic of small-cap stocks is that they are considered growth stocks, because they have a higher potential for growth. Historically,  small caps have outperformed large caps over the long term. Studies have  shown that stocks with attractive price valuation and good growth prospects tend to outperform. Small-cap stocks also tend to be focused more domestically, offering a purer local play on Brazil growth. Furthermore, in smaller markets  like those in the Latin American region, small-cap indices can actually help develop the overall market by drawing attention to the smaller stocks, which may help create more demand for direct or indirect investment, either through individual stocks or through index-based strategies tracking small-cap indices.

2. The S&P/B3 SmallCap Select Index is part of a broader index series, the S&P Global SmallCap Select. What type of small-cap stocks do these indices track?

Small cap can be defined based on either a fixed market size or on a relative  size range, the latter being what we use in Brazil. We start with a broad view of  the market, with our country index taking into account all Brazilian companies that trade on B3 and meet the minimum size and liquidity criteria. We segment those by total market cap and then take the cumulative weight of the floatadjusted market cap to categorize the different segments. We use 70%, 15%, and 15%. The top 70% represents the large caps, the next 15% the mid caps,  and the bottom 15% the small caps.

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Talking Points: Capturing the Growth of the Australian Technology Industry

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Michael Orzano

Senior Director, Global Equity Indices

The new S&P/ASX All Technology Index highlights a unique and innovative segment of the Australian market.

  1. Why is this index being introduced now?

In recent years, ASX-listed technology companies have experienced substantial growth in terms of both number of companies and market capitalization. In the past five years, the number of S&P/ASX All Technology Index constituents nearly doubled from 24 to 46, while the total market capitalization of these companies increased more than fivefold from AUD 17 billion to nearly AUD 92 billion.

In a market heavily concentrated in banks and natural resource companies, there is significant demand for an index that captures the Australian technology sector in a comprehensive yet precise way. Importantly, the technology segment measures a unique, innovative part of the market that remains a small portion of the broader Australian share universe. We also expect the index to increase the visibility of technology-related businesses listed on the ASX, which should support further growth of the sector over time.

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Indexology Magazine: Winter 2020

Is passive investing as passive as it sounds? How do three different index-based strategies seek to boost diversification? Read the latest issue for the answers to these questions and more.

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