Indexology^® Blog

The prospect of higher interest rates, fears of a prolonged global economic slowdown and a strong U.S. dollar put the brakes on commodities prices in June. The S&P GSCI, the broad commodities benchmark, ended the month down 7.6%, taking YTD performance to 35.8%, still the best first half performance since 2008.

The deteriorating economic outlook trumped fears regarding the impact of sanctions on Russian oil supplies in June. The S&P GSCI Petroleum fell 4.6% over the month. However, the biggest correction in energy prices in June came in the form of a 33.3% decline in S&P GSCI Natural Gas. The fall in U.S. natural gas prices in June belied what remains a tight global gas market. Russia continued to severely limit gas supplies to Europe and various governments across Europe are intervening in the market by way of direct payments to households, financial support to failing utilities and orders to replenish storage ahead of winter.

One bright spot in the commodities markets in June was EU carbon emissions, with the S&P GSCI Carbon Emission Allowances (EUA) rallying 7.3%. Strength in the so-called clean dark spread, a measure of the profitability of coal-fired electricity generation incorporating the cost of offsetting production with carbon credits, has seen more coal being used in the power generation mix and hence more EUAs purchased for compliance. From a regulatory standpoint, there has been significant debate regarding possible reforms to carbon price control mechanisms in Europe, which may affect price discovery over the medium term.

Industrial metals had the worst first half of the year since the Global Financial Crisis. The S&P GSCI Industrial Metals fell 13.8% over the month and was down 12.1% YTD. Prices have plummeted, as worries about a slowdown in industrial activity across major economies have dovetailed, with slumping demand in China. Copper, the great economic bellwether, fell 12.4% over the month and ended the first half of the year down 14.7%.

Against a backdrop of aggressive central bank policy action and a strong U.S. dollar, gold has been unable to turn a trick so far in 2022, while silver has been battered by fears of weakening industrial demand. After some strength earlier in the year, the S&P GSCI Precious Metals ended the first half of the year down 2.7%.

By the end of June, S&P GSCI Agriculture had fallen 18.0%, since making a multi-year high on May 17, 2022. Most of the decline was attributed to wheat and cotton. Wheat prices have been pressured by the expanding harvest of winter wheat in the Northern Hemisphere and the prospect of getting grain shipped out of the Black Sea region improving. Like other demand-sensitive commodities, the risk of a looming recession weighed heavily on the cotton market.

A recovery in feeder cattle prices, buoyed by the correction in feed prices, helped the S&P GSCI Livestock eke out a modest gain in June.

This blog is the second in the quarterly blog series we recently introduced to provide transparency into rebalance adds and drops for our S&P Quality, Value & Momentum Top 90% Multi-factor Indices (S&P QVM Top 90% Indices). The S&P QVM Top 90% Indices seek to track constituents in the top 90% of their universe, ranked by their average multi-factor score (subject to constraints) and float-market-cap weighted.

Exhibits 1, 2 and 3 summarize the June 2022 rebalance adds and drops for these indices as well as the decile ranks of their individual quality, value and momentum scores. As a reminder, the 1^st decile includes companies ranked in the top 10% of the universe (by their respective factor scores), the 2^nd decile includes companies ranked in the next highest 10%, and so on through to the 10^th decile.

S&P 500^® QVM Top 90% Index Rebalance Adds/Drops

There were 18 adds and 14 drops in the June 2022 rebalance. Since the March 2022 rebalance, Cerner Corp and People’s United Financial Inc were removed from the index, as they were acquired by Oracle and M&T Bank, respectively. Additionally, Under Armour Inc. and IPG Photonics were removed from the S&P 500.

Based on the overall multi-factor score ranks, 17% of the adds ranked in the top half of the universe, driven relatively evenly by all three factors. Similarly, all three factors contributed in relatively equal proportions to drops. Of the drops, 36% were in the 10^th decile based on quality and momentum scores, while 21% were in the 10^th decile based on value score.

S&P MidCap 400^® QVM Top 90% Index Rebalance Adds/Drops:

Seven companies were removed either due to acquisition events or movements across the cap range since the March 2022 rebalance. Therefore, there were seven more adds than drops in the June 2022 rebalance.

Momentum and quality scores primarily drove the drops from the index. Of the drops, 45% were in the 10^th decile based on their quality score, 27% based on their value score and 55% based on their momentum score.

For the adds, 28% of companies had at least two factors ranked in the top half of the universe, and roughly one-half were in the top half based on their momentum score rank.

S&P SmallCap 600^® QVM Top 90% Index Rebalance Adds/Drops:

There were 12 more adds than drops in the June 2022 rebalance. Renewable Energy Group Inc. was acquired by Chevron, while the other 11 companies were removed because they were dropped from the S&P SmallCap 600.

With respect to the adds, about half were ranked in the top half of the universe based on their momentum and value scores. In terms of the drops, most of the companies ranked quite poorly across all three factors. Of the drops, 22% were in the 10^th decile based on quality score, 39% based on value score and 50% based on momentum score.

Sector Weights

Due to the index construction methodology, large deviations from the benchmark sector weight are uncommon. Exhibits 4, 5 and 6 compare the pre- and post-rebalance active sector weights for each of the three S&P QVM Top 90% Indices.

Exhibit 4 shows that the relatively large underweight in the Consumer Discretionary sector decreased slightly, as have the overweights in IT and Financials. However, the overweight in Health Care slightly increased.

For the S&P 400 universe, the largest underweights were in Health Care and IT, which decreased and increased, respectively. The largest overweight was in Financials, which slightly decreased. Consumer Discretionary, which had an overweight pre-rebalancing, flipped to a slight underweight after the rebalance.

For the S&P SmallCap 600 QVM Top 90% Index, Energy and Health Care had the largest underweight, at approximately -0.80%, while Financials had the largest overweight, at 1.33%, after the June 2022 rebalance.

The S&P GSCI Global Voluntary Carbon Liquidity Weighted is the first-to-market benchmark for the current performance of global voluntary carbon futures markets. The index is designed to track the CBL Nature-Based Global Emissions Offset (NGO) futures, underpinned by the Verified Carbon Standard registry, and the CBL Global Emissions Offset (GEO) futures, allowing delivery from CORSIA-eligible carbon offset credits from all three major registries (see Exhibit 1). Both futures contracts are traded at the CME Group. In contrast to compliant markets like the EU Allowances, voluntary carbon markets are not government mandated but go through stringent verification and validation channels to ensure underlying projects have an impact—whether that be reforestation, avoided deforestation, renewable energy, or carbon capture, among others.

The underlying futures contracts from the CME Group are some of the newest offerings in the carbon market. The speed with which liquidity has built in these contracts and the growth in issuance (and retirement) activity indicates a strong appetite for voluntary offset credits by the private sector (see Exhibit 2). A key instrument in the world’s ability to combat climate change and accomplish the energy transition from fossil fuels to electrification, the voluntary carbon marketplace will likely continue to gain importance while providing price discovery and ease of transacting for many market participants who want to verify their reduction of tons of CO₂ equivalent.

This index may be of interest because market participants can see the price appreciation potential, or they would like to hedge their climate risk exposures. Due to the evolving nature of carbon markets, an important characteristic of the index is the flexibility to reweight, add or remove constituents at regular intervals to ensure that it can adapt over time.

Constituents in the index are weighted semiannually based on their current underlying liquidity. Minimum contract trading and liquidity rules for constituent inclusion, similar in design to the eligibility criteria used for the broad S&P GSCI, are also applied. Exhibit 3 highlights some of the important characteristics of the S&P Global Voluntary Carbon Liquidity Weighted Index.

This new index demonstrates S&P DJI’s continued efforts to provide innovative and new thematic alternative benchmarks in the commodities space. This theme offers exposure to the energy transition. With other major asset classes suffering heavy losses in the first half of 2022, the diversification benefits of alternatives have never been more apparent. For more information, visit our commodities investment theme page and check out S&P Global Commodity Insights’ energy transition resources.

Dividends have historically provided a significant source of returns.  A recent blog stated dividends have become an important source of household income for U.S. investors and accounted for 7.3% of personal income as of Q1 2022, climbing from 3.2% in 1980. Over the same period, interest income has declined in share from 16.2% to 9.2%. In the current environment of rising inflation and interest rates, dividends may also provide the benefit as an inflation hedge.

One year ago, S&P DJI expanded its S&P Dividend Aristocrats^® (DA) Indices with a new index series focusing on both dividends and ESG, targeting companies that couple consistent dividend growth with minimum ESG standards.¹ Despite offering an additional layer of sustainability, the newly launched S&P ESG Dividend Aristocrats (ESG DA) Index Series have historically been able to offer low tracking error and a dividend yield comparable to those of the historical non-ESG version.

With one year of live history, we review the performance and characteristics of the S&P ESG Dividend Aristocrats Index Series.

Similar Performance and Low Tracking Error

2021 was challenging for stock markets globally, with the return of central banks tightening globally and rising inflation after years of declining yields. Nonetheless, the S&P ESG Dividend Aristocrats Index Series managed to ride this period delivering similar and often better performance compared to its non-ESG counterparts. Furthermore, despite some market headwinds, the S&P ESG Dividend Aristocrats Indices increased their dividend yield over the past 12 months, further emphasizing the resilience of such strategies.

Increasing Dividend Yield

Exhibit 2 shows the realized trailing 12-month dividend yield for the S&P ESG Dividend Aristocrats Indices against their respective S&P Dividend Aristocrats Indices and broad benchmark indices. Over the past 12 months, the S&P Dividend Aristocrats Index Series offered comparable dividend yields and delivered a sizable yield pick-up compared with the benchmark.

Exhibit 3 shows the difference between the trailing 12-month dividend yield from May 31, 2021, to May 31, 2022. Interestingly, the S&P ESG Dividend Aristocrats Indices’ dividend yield increased over the course of the past 12 months, not only in absolute terms but also compared with the standard S&P Dividend Aristocrats versions. Although the yield was still lower, the spread has been tightening. The current market dynamics may be driving these fluctuations in yield spreads. However, it is worth noting that with additional screens applied to the ESG versions of Dividend Aristocrats, yields of the S&P ESG Dividend Aristocrats Indices could remain at a discount to their non-ESG counterparts.

Underweight Utilities

In terms of sector representation, the results were quite mixed, with different S&P ESG Dividend Aristocrats Indices overweighting different sectors (see Exhibit 4). However, one common trait is that the Utilities sector was systematically underrepresented. The reason for the Utilities underweight may lie in the index methodology, which excludes companies involved in thermal coal, among others. Compared with 2021, we didn’t identify any major trends in sector weights that remained broadly similar in both versions.

Improvement in S&P DJI ESG Score

The S&P ESG Dividend Aristocrats Indices delivered an improvement in the S&P DJI ESG Scores, averaging at 16%. Improvements were quite pronounced for the U.S, developed markets and global indices. In eurozone, the impact of the ESG screens and filter was lower, but this can be explained by the non-ESG version already having a high S&P DJI ESG Score. Furthermore, we noticed a general improvement in the S&P DJI ESG Scores since the launch of the index, except for the eurozone, where the score remained consistently high.

One year after their launch, the S&P ESG Dividend Aristocrats Index Series succeeded in providing similar performance and dividend yield, while keeping an eye on sustainability, and the series has recently expanded with the launch of the S&P 500 ESG Dividend Aristocrats Index.

The S&P ESG Dividend Aristocrats Index Series is designed to identify companies that combine consistent dividend growth with sustainability characteristics, providing an additional option for long-term, income-focused investors that are looking for high quality, dividend-paying companies with sustainable business models.

¹ For a more in-depth look into this index series, see https://www.spglobal.com/spdji/en/education/article/aligning-income-with-esg-the-sp-esg-dividend-aristocrats/.

Last week, the S&P 500^® officially entered a bear market, dropping more than 20% from its record close in January. However, not all equity indices suffered comparable losses, and one such example is the S&P 500 Low Volatility High Dividend Index. In fact, this index has outperformed by a wide margin so far in 2022.

This may come as no surprise since this index combines two strategies that have individually beaten the S&P 500 YTD. High dividend strategies have been popular in the recent market environment of high inflation and rising interest rates, where current income and shorter duration stocks are considered more favorable by some investors. Similarly, low volatility stocks have outperformed due to their defensive qualities during increased market uncertainty.

Methodology

This index applies a simple, two-step constituent screening methodology to capture the benefit of high dividend and low volatility strategies. First, the index selects the top 75 highest-yielding stocks in the S&P 500 based on their 12-month trailing dividend yield. Then, it narrows those down to the 50 stocks with the lowest realized volatility over the past 252 trading days. The remaining stocks are then weighted by the trailing 12-month dividend yield.

The index has delivered higher absolute and risk-adjusted returns than the S&P 500 since January 1990. Furthermore, it has had a lower downside capture ratio than similar high-yielding strategies since the low volatility screen acts as a quality measure to avoid high-yield stocks with sharp price drops.

Construction Philosophy

This index was built on the premise that high-yielding stocks tend to outperform the broad market in the long run. Our research team published a paper in 2019 showing just that. However, it also showed that this outperformance came at the cost of higher volatility and lower risk-adjusted returns.

The paper went on to argue that this high volatility could be attributed to the inclusion of high-yield stocks with a depressed price. Furthermore, it offered a potential remedy: a low volatility screen to help avoid high-risk companies.

This is amply demonstrated in Exhibit 3, which shows the performance of the following three hypothetical portfolios that are equally weighted.

1. High-yield portfolio: 75 stocks from the S&P 500 with the highest dividend yield
2. Low volatility/high-yield portfolio: 50 lowest volatility stocks selected from the high-yield portfolio
3. High volatility/high-yield portfolio: 25 highest volatility stocks selected from the high-yield portfolio

Since January 1990, the high-yield portfolio outperformed the S&P 500 by 1.4% annualized, but with higher volatility and a larger maximum drawdown. The low volatility/high-yield portfolio achieved a similar annualized return, but with 14.4% less volatility and a smaller maximum drawdown.

Finally, the high volatility/high-yield portfolio was much more volatile, with the lowest risk-adjusted return and largest maximum drawdown. Thus, out of these three hypothetical portfolios, the low volatility/high-yield portfolio delivered the highest risk-adjusted return and had the most pronounced maximum drawdown reduction.

Conclusion

For market participants looking for outperformance and a competitive yield with lower risk than other comparable high-yielding strategies, the S&P 500 Low Volatility High Dividend Index might be a worthy consideration.