How do the personalities of two dividend index portfolios look when reviewed under the “Factor Lens”? Using the Optimal Asset Management’s Factor Allocator tool, let’s review two strategies – S&P 500 Dividend Aristocrats and the S&P 500 High Dividend Index.
We can identify the average factor exposures of each strategy since January 1995 by viewing their Best Factor Fits (BFF).
The BFF for the S&P 500 Dividend Aristocrats is the following:
…compared to the BFF of the S&P 500 High Dividend Index:
One observation from the above factor comparison is their similar exposure to Low Volatility. From there, the differences between the strategies become apparent. To begin, only the S&P 500 Dividend Aristocrats has exposure to Quality. Secondly, the S&P 500 High Dividend Index has a larger exposure to Value and Low Momentum.
So, let’s focus on the differences. As of November 29, 2019, the following is the performance of each of these factors since January 1995.
When comparing to the S&P 500 benchmark, the S&P 500 High Dividend Index’s larger exposure to Low Momentum appears to have hurt its returns and increased its volatility. Also, High Dividend’s larger exposure to Enhanced Value may have helped its returns but increased its volatility. However, the S&P 500 Dividend Aristocrat’s exposure to Quality appears to have enhanced its performance and reduced its volatility.
How did the individual factors perform during different market regimes when compared against the S&P 500 (benchmark) according to Optimal Asset’s Factor Allocator tool?
One observation is the Factor Allocator indicates Quality’s returns were relatively strong during weak market environments while Low Momentum and Value provided relatively poor returns in this same environment. Another observation provided by the Factor Allocator tool is Low Momentum and Value provided elevated volatility in all market regimes while Quality provided some reduced volatility during periods of weak markets. One could argue based on this data that the S&P 500 High Dividend Index consisted of less defensive factors when compared to S&P 500 Dividend Aristocrats.