What story is Optimal Asset Management’s Factor Allocator’s analysis trying to tell us? First, it is important to note each strategy has a factor fit quality reading above 80% (the S&P 500 High Dividend Index – 83.72% and the S&P 500 Dividend Aristocrats – 87.62%) which means the analysis of factor exposures appears useful in the explanation of the variation in returns of each strategy. So, considering the historical performance of each of the factors explained above as well as how they each tend to behave during different market regimes, the S&P 500 High Dividend Index’s larger exposure to Value and Low Momentum coupled with its lack of Quality exposure may lead you to believe that S&P 500 High Dividend Index would have offered more volatility and lower returns when compared to the S&P 500 Dividend Aristocrats.
What about performance? How has the historical performance of these two indices reflected their underlying factor exposures? The table below is the performance since January 1995 for each strategy compared to the S&P 500 as of November 29, 2019 according to the Factor Allocator tool.
Interestingly both strategies performed well versus the S&P 500 with excess returns. However, as suspected the S&P 500 High Dividend Index provided this return by experiencing more volatility. Alternatively, the S&P 500 Dividend Aristocrats provided higher returns while providing a lower volatility experience.
So, while the Factor Allocator indicates each dividend index had a healthy exposure to the Low Volatility factor that would lead you to believe there would be some similarity in returns between the two, it was their differences that told the rest of the story.
What lesson can we learn from this analysis? Factors can provide you a personality profile of the index portfolio to give you some indication of what you might expect.
The information contained herein has been provided by Andrew Neatt, Portfolio Manager and Investment Advisor with TD Wealth Private Investment Advice and is for information purposes only. The information has been drawn from sources believed to be reliable. Graphs and charts are used for illustrative purposes only and do not reflect future values or future performance of any investment. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.
Index returns are shown for comparative purposes only. Indexes are unmanaged and their returns do not include any sales charges or fees as such costs would lower performance. It is not possible to invest directly in an index.
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