In This List

Conviction, Confidence, and Courage

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

Conviction, Confidence, and Courage

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Anu R. Ganti

Senior Director, Index Investment Strategy

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Craig Lazzara

Managing Director, Global Head of Index Investment Strategy

EXECUTIVE SUMMARY

Never wish to show courage, a wise man once counseled; courage can be displayed only in circumstances where one’s natural instinct is to be afraid, and fear is an unpleasant emotion.  This principle, with obvious qualifications, applies to investment management.  Successful portfolio management can require holding positions when one’s natural instinct is to sell.

ONCE UPON A TIME

It is Dec. 31, 1999.  You are a professional portfolio manager pondering long-term stock selections for your clients.  You share Warren Buffet’s view that “Our favorite holding period is forever,” and you decide to ask each of your four favorite Wall Street forecasters to recommend a stock to hold indefinitely.  They obligingly recommend four different names, denoted for now as Stocks A through D, which you carefully consider.

You’re well aware that some recommendations work out better than others.  What might cause you to lose confidence in any of these four stocks?  Since you will be buying the stocks in the expectation that they will go up, and in fact will outperform the market, a period of disappointing returns might weaken your determination to hold forever.

While contemplating all this, you have been holding a very old bottle of wine that a friend gave you for your last birthday.  You open the bottle, thinking that a taste might help resolve your perplexity.  As you remove the cork, suddenly vapor spews out and a genie emerges.  In gratitude for your having released him, he offers you a wish.

Of course, what you wish is to know which of the four stocks will be the best performer for the next 20 years.  Unfortunately, our genie has been corked up with the wine for a bit too long.  He knows a good bit about volatility but very little about the returns of individual stocks.  The genie does know that the market will go up in the next 20 years, and that individual stock returns will be highly skewed, as Exhibit 1 illustrates.  The median stock in the S&P 500® will appreciate by 52%, well below the average appreciation of 239%.  Only 267 of the 1,010 stocks that will appear in the S&P 500 for the next 20 years will beat the average.

Having been made aware that a relatively small number of stocks will determine your success or failure, you’re happy to have whatever specific information you can get, and ask the genie to tell you what he knows about the four recommendations.

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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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