In This List

S&P 500® Low Volatility Index: Five Decades of History

Rethinking Commodities

China's New Economy Sectors: How Are They Doing?

Blending Low Volatility with Dividend Yield in the China A-Share Market

Making STRIDEs in Evaluating the Performance of Retirement Solutions

S&P 500® Low Volatility Index: Five Decades of History

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Smita Chirputkar

Director, Global Research & Design

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

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Hamish Preston

Associate Director, U.S. Equity Indices

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Phillip Brzenk

Senior Director, Strategy Indices

S&P Dow Jones Indices (S&P DJI) publishes a series of low volatility indices, offering market participants a perspective on the returns of lower volatility equities and forming the basis for index-linked products globally.1 Low volatility indices have typically outperformed their underlying broad market benchmarks on both an absolute and a risk-adjusted basis.2 S&P DJI recently extended the returns history for one of the widely followed low volatility benchmarks—the S&P 500 Low Volatility Index—back to February 1972.3 Using the additional two decades of return information, this paper:

• Offers a longer-term perspective on the ability of low volatility indices to combine downside protection and upside participation;

• Assesses the relative importance of equity market movements and interest rates in explaining the low volatility index’s performance; and

• Demonstrates the potential applications of low volatility indices.

Exhibit 1 shows the risk-adjusted returns for the S&P 500 Low Volatility Index and the S&P 500 in each decade since 1972.

Source: S&P Dow Jones Indices LLC. Chart based on daily data between Feb. 18, 1972, and Dec. 31, 2019. Risk-adjusted returns based on the ratio of annualized returns to annualized volatility. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

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1 Please see Appendix A for an overview of the low volatility indices offered by S&P Dow Jones Indices. 2 Chan, Fei Mei and Craig J. Lazzara, “Is the Low Volatility Anomaly Universal?,” S&P Dow Jones Indices, April 2019. 3 Previously, the returns data began in November 1990.


Rethinking Commodities

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Jim Wiederhold

Associate Director, Commodities and Real Assets

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Fiona Boal

Head of Commodities and Real Assets

INTRODUCTION

Commodities have long been viewed as the poor cousin in the investment universe, and often for good reason.  Unlike equities, commodities do not offer a so-called market beta that drifts higher over time in line with economic activity.  In contrast, they present a collection of unique price returns that reflect the underlying supply and demand dynamics of physical assets that serve as the building blocks of the global economy. 

In this paper, we take a new look at commodities as an asset class and at its uses in a portfolio, which historically have been diversification and inflation protection.  We also analyze different commodity beta allocations.  Finally, we identify alternative investment uses of commodities, including as building blocks to express particular investment themes, as tactical trading tools, and as a component of a multi-asset risk premia allocation.

COMMODITIES AS AN ASSET CLASS

What does it mean to say commodities are an asset class?  What are they, and how have they performed as an investment instrument?  What are the common criticisms and misunderstandings when it comes to these distinctive assets?

Commodities have unique characteristics; they are:

  • Basic, standardized physical assets that are in demand and can be supplied without substantial product differentiation across markets;
  • Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
  • Widely used production inputs in the economy.

Even though individual commodities share these important characteristics, commodities are not homogeneous.  The concept of a broad commodity market beta is tenuous, likely a construct of those who championed the financialization of commodity markets more than 30 years ago.  Low intracommodity correlation is one of the few common threads between individual commodity markets, though there are important exceptions among commodities that form part of the same production process or may be substitutes.  There is little market “beta” when it comes to corn, copper, crude oil, and coffee.

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China's New Economy Sectors: How Are They Doing?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Liyu Zeng

Director, Global Research & Design

China’s economy is shifting from being primarily focused on investment and manufacturing to a consumption- and services-driven market.  In this paper, we use the S&P New China Sectors Index to analyze China’s growing economic sectors and examine their equity, fundamental, and price performance characteristics.

EXECUTIVE SUMMARY

  • The main sectors and industries benefiting from China’s economic Global Research & Design transformation are Consumer Discretionary, Consumer Staples,Communication Services, Health Care, Insurance, and Independent Power and Renewable Electricity Producers.
     
  • As China’s structural economic reforms deepen, the demand for benchmarks tracking sector drivers is increasing.The S&P New China Sectors Index is designed to provide equity insight into China’s new economy sectors.
  • The S&P New China Sectors Index has its largest overweights in Consumer Discretionary, Communication Services, and Consumer Staples, and its largest underweights are in Industrials, Materials, and Financials, compared with the broad Chinese equities market.
  • The S&P New China Sectors Index recorded an annualized return of 8.5% between Dec. 31, 2010, and Sept. 30, 2019, outperforming the S&P China 500 by 4.3%, indicating that the new economy sectors performed better than the broad equity market.
  • The outperformance of the S&P New China Sectors Index was dominated by sector-allocation effects.
  • New economy companies featured higher revenue growth, higher profitability, and lower leverage than the broader equities market, and they tended to be priced with higher valuation and lower dividend yield.

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Blending Low Volatility with Dividend Yield in the China A-Share 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

This paper examines the potential benefits of blending high dividend and low volatility strategies in the China A-share large-cap equity market.

  • Excluding high volatility stocks from a high-dividend-yield portfolio may reduce portfolio volatility and improve portfolio returns on a risk-adjusted basis.
  • The S&P China A-Share LargeCap Low Volatility High Dividend 50 Index overlays a low volatility screen on high dividend stocks. For the period from Jan. 31, 2009, to June 28, 2019, the index delivered pronounced excess returns on an absolute and risk-adjusted basis.
  • This index delivered a stable source of income from dividends and showed defensive qualities, with reduced drawdown during down markets.
  • The active exposure to dividend yield, low volatility, and value factors contributed most to the active returns, while the sector allocation bias accounted for most of the active risk for the index.

INTRODUCTION

Dividend investment is a popular investment strategy among incomeseeking market participants. Since they were first launched in 2003, dividend ETFs with diverse designs have proliferated across regions of varied characteristics.

In September 2012, S&P Dow Jones Indices launched the S&P 500® Low Volatility High Dividend Index. It uses a unique, rule-based dividend strategy that is designed to combine high dividend yield and low return volatility in a single index. Compared with pure dividend-yield-based strategies, this index has been shown to provide enhanced risk-adjusted performance and incremental defensiveness, which can be particularly attractive to conservative investors.

In the following sections, we examine the effectiveness of a low volatility high dividend yield strategy in the China A-share large-cap equity market, based on companies in the S&P China A Domestic LargeCap Index. We also demonstrate indexing implementation of this strategy using the S&P China A-Share LargeCap Low Volatility High Dividend 50 Index.

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Making STRIDEs in Evaluating the Performance of Retirement Solutions

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Smita Chirputkar

Director, Global Research & Design

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Philip Murphy

Managing Director, Global Head of Index Governance

EXECUTIVE SUMMARY

The S&P Shift to Retirement Income and Decumulation (STRIDE) Index Series incorporates an innovative risk management framework focused on providing increasing levels of clarity and stability around sustainable annual consumption in retirement. This paper tests S&P STRIDE’s approach to consumption risk management and asset allocation over the period from 2003 to 2018 for a hypothetical cohort of 2010 retirees by comparing the S&P STRIDE Glide Path 2010 Index Total Return to the average 2010 target date fund (TDF). Our main findings are as follows.

  • The risk management approach employed by S&P STRIDE would have helped reduce uncertainty about retirement income through a period of variable interest rates, inflation, and market returns. In particular, we show how the risk management component of the S&P STRIDE Index can provide clarity and stability around affordable future consumption prior to and into retirement. The approach aims to help retirement plan participants seamlessly transition from accumulation to retirement.
  • The risk management strategy can be used to reduce the impact of market, inflation, interest rate, and sequencing risks on retirement consumption.
  • In contrast, we find that an industry average of traditional 2010 TDFs exhibited high variability in terms of retirement consumption over the period. Estimates of affordable consumption from such a strategy were highly sensitive to market risk, interest rates, and inflation. As a result, these strategies demonstrated large fluctuations in the level of expected retirement consumption over the period.
  • INTRODUCTION

    Retirement can mean different things to different people. For some, retirement means a complete stop from working. For others, it means ending a professional career in pursuit of something new. Regardless of the definition, retirement normally marks the point when the primary source of income ends and savers begin to rely on their accumulated balances to maintain their standard of living. Therefore, in the context of retirement, a primary goal is often to be able to sustain an inflation-adjusted stream of income, or a level of consumption associated with a standard of living, throughout retirement and to have relevant and meaningful information about what that level of sustainable consumption stream is before and throughout retirement.

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