In This List

A Case for Dividend Growth Strategies

Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

The VIX Index and Volatility-Based Global Indexes and Trading Instruments

ETF Transactions by U.S. Insurers in Q1 2020

How Smart Beta Strategies Work in the Australian Market

A Case for Dividend Growth Strategies

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

Dividend strategies have gained a foothold with market participants seeking potential outperformance and attractive yields, especially in the low-rate environment since the 2008 financial crisis and the even lower-rate environment we’ve seen in 2020 as the world deals with the economic fallout from COVID-19.  

With the volatile economic situation that emerged in 2020, and market uncertainties putting pressure on corporate earnings, high-yielding companies without strong financial strength and discipline may not be able to sustain future payout and could be prone to dividend cuts and suspensions.

Stocks with a history of dividend growth, on the other hand, could present a compelling investment opportunity in an uncertain environment.  An allocation to companies that have sustainable and growing dividends may provide exposure to high-quality stocks and greater income over time, therefore buffering against market volatility and addressing the risk of rising rates to some extent.

This argument goes beyond the traditional realm of domestic large-cap stocks.  It also works for small- and mid-cap stocks and can be applied to international markets as well.

The S&P High Yield Dividend Aristocrats® is designed to track a basket of stocks from the S&P Composite 1500® that have consistently increased their dividends every year for at least 20 years.  This paper investigates the benefits of a dividend growth strategy by analyzing the characteristics of the S&P High Yield Dividend Aristocrats and comparing it to the S&P 500® High Dividend Index—a high-dividend strategy built on the S&P 500 (see the Appendix for an overview of the index’s methodology).  In addition, this paper illustrates a few indices that focus on the strongest dividend growers in global and international markets, including Canada, the eurozone, the U.K., Pan Asia, and Japan.

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Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

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Berlinda Liu

Director, Global Research & Design

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

SUMMARY

The Fleeting Alpha Scorecard is a semiannual report showing how well outperforming mutual funds from one three-year period continue to outperform thereafter. It combines two other S&P Dow Jones Indices reports, the SPIVA® U.S. Scorecard and the the Persistence Scorecard. The former measures the percentage of active managers that beat their benchmarks across various equity and fixed income categories. The latter shows the likelihood that strong performers in early periods maintain their status relative to other funds in subsequent periods.

For the Fleeting Alpha Scorecard, we first identify funds that beat their benchmarks, based on three-year annualized returns, net-of-fees. We then examine whether these funds continue to outperform during each of the next three one-year periods.

Report 1 shows the performance persistence of managers investing in various domestic and international equity categories, based on trailing three-year returns. Of the 18 categories in domestic equity, eight did not show funds with alpha persistence after three years. For example, as of Dec. 31, 2016, roughly 10% of 313 large-cap value funds had outperformed the S&P 500® Value in the previous three years. By the end of 2019, none of these 31 winners had maintained that status for three consecutive years. Of the winners at the end of 2016, just 12.9% of all domestic equity funds beat the S&P Composite 1500® in each of the three following one-year periods.

The vast majority of domestic equity funds showed little outperformance persistence, with notable exceptions in the small- and mid-cap spaces. Improvement in persistence mainly came from the mid-cap growth funds and the small-cap growth funds, in which 67% and 50%, respectively, of the past winners were able to generate positive alpha in the three subsequent one-year periods (in a small sample size).

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The VIX Index and Volatility-Based Global Indexes and Trading Instruments

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Berlinda Liu

Director, Global Research & Design

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Matt Moran

Vice President of Business Development, Chicago Board Options Exchange (Cboe)

The Cboe Volatility Index® (VIX® Index) measures the market’s expectation of future volatility conveyed by S&P 500 Index option prices. The VIX is recognized as a premier gauge of expected US equity market volatility. The 2000–09 decade experienced two deep bear markets for equities that saw numerous short-term periods of high levels of investor uncertainty. Most investors recall how during the financial crisis of 2008–2009, the correlations between equities rose globally and traditional diversification goals became difficult to achieve. Exchange-listed VIX futures were launched in 2004, and VIX options were launched in 2006. During the 2008–09 financial crisis, VIX futures and VIX options experienced tremendous growth, as interest in and use of such index-based products as exchange-traded notes and exchange-traded funds grew. These products have become widely used in investors’ strategies ranging from trading tactical views on volatility to incorporating volatility trades and hedges in risk management and multiasset strategies.

This study addresses several questions investors have asked related to the VIX Index, volatility-based trading products, and the use of VIX futures in portfolio construction. These questions include the following:

  1. What does the VIX Index measure, and what does a VIX level signify?
  2. What are some indexes that measure expected volatility of European or Asian stock indexes?
  3. How do features such as convexity and negative correlation make the VIX an intriguing investment gauge?
  4. Is the VIX Index tradable, and if not, why?
  5. What tradable volatility-based futures and options products are available?
  6. How do contango and backwardation affect the returns of VIX futures-based strategies?
  7. What volatility benchmark indexes are available, and what is their impact when added to S&P 500 portfolios?

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ETF Transactions by U.S. Insurers in Q1 2020

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Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

In May 2020, we published our annual study of ETF usage by U.S. insurance companies. The data for that analysis is only available annually. However, because of the market volatility in the first quarter of 2020, we wanted to analyze the use of ETFs by U.S. insurance companies prior to the next annual analysis. While holdings data is not available on a quarterly basis, we were able to analyze ETF transactions. In Q1 2020, U.S. insurance companies increased their ETF usage by USD 4.1 billion, as well as the number of transactions.

ETF TRADES

In the first quarter of 2020, insurance companies traded USD 24.6 billion in ETFs (see Exhibit 1).  This amount is roughly on scale with the total holdings of USD 31.2 billion as of year-end 2019.   

Exhibit 1

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How Smart Beta Strategies Work in the Australian Market

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Liyu Zeng

Director, Global Research & Design

EXECUTIVE SUMMARY

With increasing interest in smart beta strategies in the Australian equity market, we examined the effectiveness of six well-known risk factors, size, value, low volatility, momentum, quality, and dividends, in the Australian equity market from Dec. 31, 2004, to May 29, 2020.

  • Quintile analysis showed that low volatility, high momentum, and high quality delivered the most persistent absolute and risk-adjusted return spreads, but small cap and value did not generate incremental return in the Australian market.
  • Among the Australian factor indices offered by S&P Dow Jones Indices (S&P DJI), the quality and momentum indices delivered the highest excess returns, while the low volatility and dividend indices had lower volatility than the S&P/ASX 200.
  • Our macro regime analysis showed that most factor portfolios in Australia were sensitive to local market cycles and investor sentiment regimes.
  • The distinct cyclicality of factor performance in Australia indicated its potential for implementation of active views on the local equity market.
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FACTOR-BASED INVESTING IN THE AUSTRALIAN EQUITY MARKET

Smart beta strategies have gained significant attention in the asset management industry, and the exchange-traded products (ETPs) tracking factor indices have experienced significant asset growth since the end of 2008. Factor-based strategies are a category of smart beta strategies that target specific risk factors.  They share some common characteristics with passive investing, such as rules-based construction, transparency, and cost-efficiency, and they also share features of active investing in that they aim to enhance return and reduce risk compared to market-cap-weighted indices.

Single-factor indices are constructed explicitly to capture a specific risk factor and exhibit distinct cyclicality in response to a changing market environment, which also makes them ideal tools for implementation of active views. 

In Australia, although the adoption of factor-based investing by local market participants is behind the U.S. and some Asian markets (like Japan), the growth of factor-based ETPs has accelerated in recent years, achieving 46% growth in net assets in the past 18 months in local currency terms as of Dec. 31, 2018, and accounting for 10.5% of the Australian ETF market. Dividend products still dominate the Australian factor-based ETP market, but we observed the proliferation in categories and the increasing demand for factor-based index-linked products within the Australian equity market.

Based on the performance contribution analysis for the S&P/ASX 200 portfolio, the Financials and Materials sectors contributed about 63.6% of the total performance of the portfolio for more than 15 years.  At a stock level, the top five large-cap contributors (BHP Group Ltd, Commonwealth Bank of Australia, Westpac Banking Corporation, CSL Limited, and Australia and New Zealand Banking Group Limited) together contributed approximately 49% of the total portfolio performance over the same period.  This suggests that sector or size bias might have  a significant impact on the excess return of factor portfolios in the Australian market.

In this paper, we examined the effectiveness of six well-known risk factors (size, value, low volatility, momentum, quality, and dividend) in the Australian equity market and the behavior of these factors under different market regimes.

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