It’s been a tough start to the new year for the S&P 500®, with a 6.4% decline (as of Feb. 3, 2016). However, the year-to-date performance of certain factor-focused smart-beta indices tied to subsets of the S&P 500 is relatively bright.
The S&P 500 is a well-diversified US equity index, seeking to provide exposure to companies with various characteristics. While some of these factors, such as growth or high beta, can be viewed as cyclical and may tend to lead an index constituent to perform well in a “risk-on” environment, others, such as low volatility or dividends, may be more defensive and potentially lead constituents to perform better in a “risk-off” market. Some of these defensively oriented indices have demonstrated higher performance in the start the year.
The S&P 500 Low Volatility Index is designed to track the 100 least-volatile stocks within the broader S&P 500 as measured by S&P DJI’s proprietary methodology. This low-volatility index is rebalanced and reconstituted on a quarterly basis in an effort to regularly provide exposure to less volatile securities.
As of January 31, 2016, financials (27%), consumer staples (22%), industrials (16%), and utilities (12%) were the largest sector weights in the S&P 500; the MSCI USA Minimum Volatility Index, which is tied to a different parent index, has sector bands. The MSCI USA Minimum Volatility Index’s recent sector weights were financials (22%), health care (20%), information technology (15%), and consumer staples (15%). [According to iShares.com]
The top 10 holdings for the S&P 500 Low Volatility Index include Campbell Soup (CPB) and Coca-Cola (KO). In contrast with the S&P 500, exposure to information technology in the S&P 500 Low Volatility Index is limited (at 2.8%), and there are currently no energy holdings. The S&P 500 Low Volatility Index was down 2.4% year-to-date as of Feb. 3, 2016.
Meanwhile, the S&P 500 Dividend Aristocrats® currently holds 50 constituents from the S&P 500. The methodology for the S&P 500 Dividend Aristocrats requires that its constituents have increased their dividends for the last 25 consecutive years. The index is rebalanced on a quarterly basis, though companies enter or exit on an annual basis. Some current constituents, including Hormel Foods (HRL) and Johnson & Johnson (JNJ), have increased dividends for more than 45 consecutive years.
As of January 2016, relative to the S&P 500 Low Volatility Index, the weights of consumer staples (27%) and energy (4%) in the S&P 500 Dividend Aristocrats were higher, while financials (11%) and utilities (2%) were lower. The S&P 500 Dividend Aristocrats has declined 2.7% year-to–date, as of Feb. 3, 2016.
The methodology for a third subset of the S&P 500 Index, the S&P 500 Low Volatility High Dividend Index, combines two defensive factors. The index seeks to include the 50 least-volatile, high-dividend-yielding securities in the S&P 500 and is rebalanced on a semiannual basis. The methodology for the S&P 500 Low Volatility High Dividend Index recognizes companies for their yield, but not the longevity of payments.
As such, it is no surprise that the utilities sector (25% of assets) is overweighted relative to other S&P 500-based sub-indices, while health care (7%) is underweighted. Financials (19%) and consumer staples (17%) are other heavily-weighted sectors. HCP Inc. (HCP) and TECO Energy (TE) are two of the current holdings.
The S&P 500 Low Volatility High Dividend Index was up 0.2% year-to-date through Feb. 3, 2016. (note, this is what I pulled on Feb 4 from the SPDJI website)
There are ETFs available that track these factor-based indices. S&P IQ Global Markets Intelligence Group provides research and rankings on approximately 1,100 ETFs on a daily basis. To learn more, visit http://trymsatoday.com/ or follow me on Twitter @ToddSPGlobal.
My colleague, Sam Stovall, U.S. Equity Strategist for S&P IQ Global Markets Intelligence Group, will be speaking at an S&P Dow Jones Indices event titled “Where Can Smart Beta Take You?” on Feb. 24, 2016. You can register for the live streaming or in-person event.
S&P IQ Global Markets Intelligence Group operates independently from S&P Dow Jones Indices.
All information as of [February 4]