My intent was to opine on watershed moments in design, those individual indices that marked advancement, a change in approach, or increased utility. Almost immediately, I received “Yeah, but what about…?” communiques.
So forthwith I complete my all-too-brief, original list with the expectation of eventually correcting a few glaring omissions.
Dow Jones Sustainability Index (1999): Today, we take for granted that ESG—environment, social, and governance factors—are important considerations for corporations and market participants alike. In 1999, however, the concept was nascent at best. The Dow Jones Sustainability Indices were the first benchmarks to focus exclusively on companies that adhered to “best-in-class” sustainable practices. Since that time, the S&P ESG suite has developed into a fast-growing and comprehensive framework that includes such dynamics as carbon emissions, environmental impact, corporate citizenship, and human capital development, among others. As ESG matures as an investing discipline, it has become clear that individual perceptions can vary on highly granular dimensions, so such a framework is necessary in order to construct indices to meet bespoke needs.
TIE – Dow Jones U.S. Select Dividend Index (2003) and S&P 500® Dividend Aristocrats® (2005): Since 1926, dividends have contributed approximately one-third of the total return of the S&P 500. Few, then, would suggest that investing with an eye toward optimizing that income was uncharted territory. In 2003, however, President George W. Bush signed tax law changes that offered more favorable treatment of dividends and the stage was set for the introduction of the Dow Jones U.S. Select Dividend Index. With components weighted according to indicated dividend yield, “Select Div” pioneered the category of dividend indexing and is often considered among the first wave of smart beta indices. Two years later, the S&P 500 Dividend Aristocrats offered a different take on dividend exposure by encapsulating shares with consistent records of increasing payouts. These two index series remain early testimony to the idea that there are always catalysts for new index development.
S&P 500 Low Volatility Index (2011): Finally, if one accepts that weighting components according to dividend yield can be considered the earliest appearance of smart beta, then the S&P 500 Low Volatility Index truly established the concept in the indexing firmament. This index was the first genuinely successful entry into the factor-based space, which seeks to amplify or attenuate the drivers of investment performance (cap size, value versus growth, momentum, etc.). At its heart is the somewhat counterintuitive, though heavily documented, notion that lower volatility stocks can offer superior risk-adjusted returns over time. By indexing what was once solely the province of quantitative active managers, these strategies democratized and lowered the cost of access for all market participants.
So, there you have it—seven major milestones on the timeline of index development. Invitation to (further) dissent in 3, 2, 1…go.