Indexology^® Blog

How do active managers in Latin America stack up to their benchmarks? Discover the key takeaways from the latest SPIVA Latin America Scorecard with S&P DJI’s Tim Edwards and Ericka Alcántara.

https://youtu.be/fAw4GaEao1Q

High-dividend-yielding stocks have been prevalent in 2022, as rising interest rates have put downward pressure on long duration assets. At the same time, market participants are increasingly seeking to align investments with their personal and societal values. The S&P ESG High Yield Dividend Aristocrats^® Index may be a strategy that checks both of these boxes. Launched in March 2021, this index strives to achieve low tracking error and comparable dividend yield to the S&P High Yield Dividend Aristocrats Index while incorporating meaningful ESG improvement.

Combining Dividend Aristocrats and ESG Methodology

The S&P ESG High Yield Dividend Aristocrats Index combines the S&P Dividend Aristocrats methodology with a sustainability overlay. To qualify for the index, a company must first have consistently increased dividends every year for at least 20 years. This initial filter tilts the index toward selecting higher-quality companies, since the ability to consistently grow dividends over a long period of time can be an indication of financial strength, discipline and durable earning power.

Next, multiple ESG screens are applied. The index excludes companies in the lowest quartile of S&P DJI ESG Scores. Additional ESG exclusion reviews are conducted quarterly based on business activities, as well as United Nations Global Compact (UNGC) breaches. These ESG screens serve to enhance the already stringent qualifications of the Dividend Aristocrats methodology.

Performance

Since January 2011, the S&P ESG High Yield Dividend Aristocrats Index has generated a 12.92% annualized return versus 11.87% for the S&P 1500^TM, while exhibiting less volatility.

Recently, the outperformance of the S&P ESG High Yield Dividend Aristocrats Index versus the S&P 1500 has been even more pronounced. Year-to-date, the S&P ESG High Yield Dividend Aristocrats Index has outperformed the benchmark by 15.25%. One reason for this is that high-yielding indices, mainly through their lower durations, offered greater protection against rapidly rising interest rates compared to the benchmark.

Comparison of S&P DJI ESG Scores and Dividend Yields

Exhibit 3 shows that the S&P ESG High Yield Dividend Aristocrats Index offered notable S&P DJI ESG Score improvement over the S&P High Yield Dividend Aristocrats Index. The S&P DJI ESG Score improved by 11 points per year on average, revealing an annual increase of over 20%.

The S&P ESG High Yield Dividend Aristocrats Index and S&P High Yield Dividend Aristocrats Index have had comparable yields historically, and both have held a significant yield advantage over the S&P 1500 (see Exhibit 4). Over the period examined, the average annual dividend yields for the S&P ESG High Yield Dividend Aristocrats Index, S&P High Yield Dividend Aristocrats Index and S&P 1500 were 2.73%, 2.88% and 1.84%, respectively.

Exhibit 5 shows the average year-over-year annual percentage dividend growth rate for current S&P ESG High Yield Dividend Aristocrats Index constituents. The average year-over-year dividend growth rate over the past 20 years was 11.26%, far surpassing the average year-over-year U.S. CPI rate of 2.35% over the same period.

Conclusion

For market participants who are looking for high-quality companies that align with their personal values, as well as a history of stable and attractive dividend payments, the S&P ESG High Yield Dividend Aristocrats Index may be an option to consider.

Academic theorists often assert the decision of where to invest as more important than the decision of what to invest in. Studies suggest that up to 90% of investment returns are attributable to location.

Regional equity indices represent different combinations of geographic and sector exposure. These differences can potentially improve the diversification benefits available when combining indices. We compare the underlying sector and geographical revenue exposures of two S&P DJI regional indices and show that utilizing combinations of equity indices may improve an investor’s risk/return potential, as well as reduce home bias (an anomaly whereby asset allocators overweight their domestic stock market).

What Is the S&P 500^®?

Widely considered the primary gauge of the U.S. large-cap stock market, the S&P 500 is a float-adjusted, market-capitalization-weighted index that reflects 500 of the largest, most well-known companies domiciled in the U.S. The index incorporates a range of inclusion criteria, including a profitability screen. The S&P 500 represents over 80% of the total U.S. market capitalization as measured by the S&P Total Market Index (TMI). Many of the index’s constituents have a major global presence, with revenues generated in a wide range of foreign countries. Therefore, despite its U.S. focus, the S&P 500 provides insight into companies with a diverse revenue base across geographies and sectors.

Europe versus the U.S. – Differences in Exposure

The S&P Europe 350^® is a European-centric counterpart to the S&P 500. The index focuses on the largest blue-chip companies domiciled in 16 European countries, weighted by float-adjusted market capitalization based on a range of inclusion criteria.

We use FactSet Geographic Revenue Exposure (GeoRev™) data, adjusted for sales-weighted exposure, to understand the geographic spread of constituent revenues for both the S&P 500 and the S&P Europe 350. For example, companies in the S&P 500 generate around 70% of their revenue in the U.S., while companies within the S&P Europe 350 generate only 24% of their revenue from the same location.

Exhibit 1 compares the S&P 500 and the S&P Europe 350. It shows that the revenues of the S&P Europe 350 have a greater tilt away from the U.S. and toward Europe than the S&P 500. Therefore, a strategy combining the two indices may lead to a more diverse geographic revenue exposure.

In practice, industries are not distributed evenly across geographies. Exhibit 2 shows that the S&P Europe 350 has significant weight in Industrials and Health Care, reflecting the strong franchises in these sectors in countries such as Germany and France for Industrials and the U.K. for Health Care. The S&P 500 has a higher weight in Information Technology and Communication Services than the European index.

Exhibit 3 provides the annualized total return and the return/risk ratios for various hypothetical combinations of the S&P 500 and the S&P Europe 350 over different periods ending in September 2022. Exhibit 4 draws the efficient frontier for different combinations of S&P Europe 350 and S&P 500 allocations. The results show that over longer time periods, a hypothetical combination of European and U.S. indices offered a higher return and more favorable risk profile than the S&P Europe 350 investment alone, perhaps reflecting the benefits of diversification.

Commodities, represented by the broad-based S&P GSCI, fell 1.7% in November on the back of weakness in the petroleum and grains complexes. Global commodities markets were particularly hit this month by worries over rare demonstrations in China against COVID-19 curbs, with oil and grains falling to multi-month lows and safe-haven gold rising. After 11 months, the S&P GSCI was up 27.8% YTD, defying higher interest rates and growing fears of a prolonged global economic slowdown.

The S&P GSCI All Crude has lost over a third of its value since peaking in early March (and giving up all gains following the Russia-Ukraine conflict); it might be said that oil prices are nodding in agreement with Treasury yields regarding an approaching economic slowdown. In the petroleum complex, a relatively tight global supply picture is competing with fears of an economic slowdown, a strong U.S. dollar, government intervention to address skyrocketing retail energy prices and signs that energy consumers have taken steps to limit consumption. A drop in financial market participation in the major oil derivative markets has contributed to higher levels of volatility. Market participants will be eagerly awaiting a decision from EU member countries regarding a price cap on Russian oil in early December, as well as the Dec. 4, 2022, OPEC+ meeting to provide further market direction.

The S&P GSCI Grains declined 4.3% in November. In the wheat market, cheap supplies from Russia and elsewhere in the Black Sea region have kept a lid on prices. In contrast, soybeans were supported by strong onshore soymeal demand in China. Argentina’s decision to give a temporary exchange rate for soy exporters until the end of the year will likely encourage a surge of exports in December. The S&P GSCI Cotton rose 20.4% in November but remained more than 50% off its May high. As apparel sales contract, the collapse in cotton prices has been attributed to weaker Chinese demand for cotton yarn, in what could be a sign that core inflation has started to wane. The S&P GSCI Livestock was unchanged over the month.

Industrial metals have so far avoided the malaise caused by Chinese unrest, and expectations of a global slowdown instead focused on steps announced by China aimed at bailing out its struggling real estate sector. The S&P GSCI Industrial Metals rose 12.2% over the month, while nickel rallied 23.9%.

The S&P GSCI Gold gained 6.8% in November, ending a seven-month losing streak. Signs that the U.S. Fed could scale back the pace of its interest rate hikes, along with the ongoing failures in the cryptocurrency ecosystem, helped support the so-called safe-haven asset.

To learn more about the S&P GSCI and related indices, check out our Commodities Theme Page.

The growth of index-based passive investing can be attributed to its transparency, efficiency and low cost, along with active management shortcomings. More recently, buoyed by the growth of direct indexing, there has also been increased demand for indices that select a subset of constituents from underlying benchmarks and are designed to meet specified objectives.

S&P DJI recently launched the S&P Focused Indices, which are designed with direct indexing use cases in mind.

S&P Focused Indices Methodology Overview

The S&P Focused Index Series currently comprises three indices: S&P 500^® Focused 50 Index, S&P 500 Focused 100 Index and S&P 500 Catholic Values Focused 100 Index. The first two are based on the S&P 500, and the third index is based on the S&P 500 Catholic Values Index. The target company counts are 50, 100 and 100, respectively, and the indices are reconstituted annually.

Each S&P Focused Index is designed to have similar Global Industry Classification Standard (GICS^®) industry group weights as its underlying index, which has also resulted in similar sector weights historically.

Exhibit 1 compares the GICS sector and industry group weights of each S&P Focused Index against its benchmark, as of Oct. 31, 2022. The results were similar to their benchmarks; differences were typically less than 1%.

Back-Tested Performance History

Perhaps unsurprisingly, the similarity in sector and industry group weights between the S&P Focused Indices and their respective underlying indices contributed to similar long-term performance, historically. For example, only 0.03% separated the annualized returns of the S&P 500 Focused 50 Index and S&P 500 since December 2009.

However, greater deviations were observed over shorter horizons. For instance, the S&P 500 Focused 50 Index outperformed the S&P 500 by 2.36% YTD and by 2.99% over the past 12 months.Exhibit 4 shows that the S&P Focused Indices’ construction provided similar turnover figures as their benchmarks, historically.

As a result, the S&P Focused Indices’ construction may be relevant for direct indexing managers looking to achieve similar sector and industry group weights as their respective underlying indices, but with fewer names.