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Comparing Defensive Factors in the Recent Market Environment

Introducing the S&P SmallCap 600 QVML Top 90% Multi-Factor Index

iBoxx Sovereign Debt Indexing with ESG Scores and Green Bonds

Global Islamic Indices Gained over 7.5% in Q2 2023, Outperforming Conventional Benchmarks YTD

Follow the ESG Leaders

Comparing Defensive Factors in the Recent Market Environment

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Andrew Neatt

Private Investment Advice

TD Wealth

On Sept. 17, 2020, S&P DJI’s Indexology blog shared a post I wrote titled “Comparing Defensive Factors During the Last 3 Bear Markets.” This blog is a continuation of that study, examining the results of the same factors during the 18-month period around the 2022 market correction that led the S&P 500® officially into bear market territory.

As explained in the September 2020 post, Low Volatility and Quality have been commonly referred to as defensive factors. One reason is they have historically exhibited less volatility, as measured by standard deviation, on a consistent basis. Another reason is that over the long term, the maximum drawdown of each of these indices has not matched the extent of the maximum drawdown experienced by the S&P 500. A third reason is that, on average, the S&P 500 Quality Index and the S&P 500 Low Volatility Index have outperformed the S&P 500 during the worst equity market regimes.

In the 2020 post, the bear markets of 2002, 2009 and 2020 were compared by examining the performance of the S&P 500, S&P 500 Low Volatility Index and the S&P 500 Quality Index over an 18-month period that included similar time frames pre and post equity market low. Specifically, the 2002 analysis included 88 days of recovery after the low of 2002, the 2009 analysis included 116 days of recovery after the low of 2009, and the 2020 analysis included 102 days of recovery after the most recent low. This update examines an 18-month period from June 30, 2021, to Dec. 31, 2022, including 80 days of recovery after the 2022 closing low of the S&P 500, registered on October 12.

As a refresher here are the three bear market comparisons from the 2020 report.

The three periods examined above showed the consistently reduced volatility associated with the S&P 500 Quality Index and the S&P 500 Low Volatility Index compared to its benchmark, the S&P 500, during those three bear markets. When it comes to returns, the S&P 500 Low Volatility Index and the S&P 500 Quality Index both outperformed in 2002 and 2009. However, in 2020, while the S&P 500 Quality Index outperformed the S&P 500 again, the S&P 500 Low Volatility Index underperformed.

How did the S&P 500 Quality Index and the S&P 500 Low Volatility Index fare during the most recent challenging equity market environment?

Over the 18-month period from June 30, 2021, to Dec. 31, 2022, the defensive nature of the two indices held up relatively well versus the S&P 500. Both generated superior relative returns over the measurement period, but only the S&P 500 Low Volatility Index experienced lower volatility versus the S&P 500, while the S&P 500 Quality Index was generally in line with the S&P 500.

Whether we are still in the midst of a prolonged bear market or in the early stages of a new bull market is not part of the discussion of this analysis. However, what is interesting to note from this update is that defensive factors continue to show some relative strength during poor equity environments.

The information contained herein has been provided by Andrew Neatt, Senior Portfolio Manager and Senior Investment Advisor of TD Wealth Private Investment Advice 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.

TD Wealth Private Investment Advice is a division of TD Waterhouse Canada Inc., a subsidiary of The Toronto-Dominion Bank.


The posts on this blog are opinions, not advice. Please read our Disclaimers.

Introducing the S&P SmallCap 600 QVML Top 90% Multi-Factor Index

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Wenli Bill Hao

Senior Lead, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

For market participants seeking to measure small-cap, multi-factor equity premia with greater diversification and historically lower tracking error (TE), S&P DJI has recently launched the S&P SmallCap 600® Quality, Value, Momentum and Low Volatility (QVML) Top 90% Multi-Factor Index.

In this blog, we will examine the index construction methodology, historic performance, sector composition and factor exposure.

Methodology Overview

The S&P SmallCap 600 QVML Top 90% Multi-Factor Index uses a systematic bottom-up approach to select the top 90% stocks, ranked by their multi-factor scores, from the S&P SmallCap 600® universe. Moreover, the constituents are weighted by floated-adjusted market cap (FMC) and rebalanced quarterly. Here, the multi-factor score is defined as the average of the underlying quality, value, momentum and low volatility Z-scores.1 In essence, the index excludes the bottom 10% lowest ranked constituents based on their multi-factor scores.

Empirical back-tested analysis shows that, in the S&P SmallCap 600 universe, the lowest-ranked decile exhibited the lowest performance over the period tested. Hence, T90%, which removes the lowest-ranked decile, would have outperformed the S&P SmallCap 600. Here, stocks have been ranked by their multi-factor score and grouped into deciles (D1 = the highest ranked, D10 = the lowest ranked), as shown in Exhibit 1.

The S&P SmallCap 600 QVML Top 90% Multi-Factor Index was designed to have high diversification and low TE to its benchmark. The slopes of the lines in Exhibit 2 represent the information ratios (IR; defined as the ratio of annualized excess return divided by annualized TE) for a series of indices, each differentiated by the number of deciles removed. For example, T90% removes only the lowest-ranked decile (ranked by multi-factor score), T80% removes the two lowest-ranked deciles (i.e., the 20% lowest-ranked stocks) and so on.

As shown in Exhibit 2, T90% had the highest IR. As more deciles were removed from the back-tested results, their IRs became lower, which means the excess risk (TE) was not proportionally compensated by the excess return.

Performance Comparison

Historically, the S&P SmallCap 600 QVML Top 90% Multi-Factor Index outperformed its benchmark for all periods studied, in both the long and short term, and in terms of both total returns and risk-adjusted returns (see Exhibit 3). The empirical results show that multi-factor premia do exist over the long-term horizon.

Tracking Error and Information Ratio

Given the index design, the S&P SmallCap 600 QVML Top 90% Multi-Factor Index had a low TE over time, based on daily total return calculation (see Exhibit 4). Through targeted multi-factor exposure, the strategy generated excess return and had a positive IR for all periods studied, in both the short and long term.

Sector Composition

Exhibit 5 shows the historic sector exposures of the S&P SmallCap 600 QVML Top 90% Multi-Factor Index and the S&P 600. The small sector exposure differences (less than 1%) for all sectors show that the strategy has retained the core characteristics of its benchmark historically.

Factor Exposure

Exhibit 6 illustrates the factor exposure difference of the S&P SmallCap 600 QVML Top 90% Multi-Factor Index versus the S&P 600, as measured through the lens of the Axioma Risk Model Factor Z-scores. The strategy had higher exposures to quality (higher profitability and lower leverage ratio), value (higher earnings yield and the book-to-price ratio) and momentum, while it had lower volatility (lower beta and volatility). The findings are in line with the index design, which selects the top 90% stocks in terms of their multi-factor scores.

1 Please refer to the S&P QVML Multi-Factor Indices Methodology for more details.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

iBoxx Sovereign Debt Indexing with ESG Scores and Green Bonds

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Paulina Lichwa-Garcia

Associate Director, Fixed Income Indices

S&P Dow Jones Indices

The iBoxx Sovereign Debt Indices span developed and emerging markets, including the iBoxx Global Government Index (GGI), iBoxx Eurozone, iBoxx USD Emerging Markets Sovereigns and iBoxx Global Emerging Market Index (GMEX) series.

Interest in government debt has increased since last year, following the “run-to-quality” amid the 2022 markets’ rout and the shift to a higher interest rate environment, which made sovereign yields attractive again.

At the same time, with sustainability considerations becoming mainstream, especially in Europe, the demand for sovereign ESG solutions has also picked up. Given the importance and the size of the sovereign debt market, sustainability benchmarks still have a lot of room to grow.

The iBoxx Indices shown in Exhibit 1 show three examples of different index solutions to approach government debt with a sustainability overlay. Exhibit 1 summarizes their key statistics and compares them to broad benchmarks.

Developed Markets: Eurozone Exposure

Firstly, the iBoxx EUR Sovereigns ESG Tilted Index reflects exposure to the eurozone government debt market by overweighing countries with a positive ESG score1 and excluding nations in the very high risk category. In addition, only countries that are considered “free” or “partially free” by Freedom House2 are included. The final composition gives higher weights to countries with favorable Sustainalytics country-risk scores.

On the other hand, the iBoxx EUR Eurozone Sovereigns Green Bonds Capped Index uses a different approach altogether. While still providing exposure to the eurozone debt market, the sustainability overlay focuses on impact, rather than risk, with constituents limited to green bonds only. After being formed by supranationals, the green bond market then became dominated by corporate issuers, and we are now seeing a steady increase in sovereign green bonds. As per their definition, green bonds must be issued with the Use of Proceeds (UoP) earmarked for environmentally friendly projects. The iBoxx solution leverages the Climate Bond Initiative’s (CBI)3 green bonds database, which uses a proprietary taxonomy aligned with the Paris decarbonization trajectory. Bonds included in the benchmark cover investment grade sovereign issuers with a minimum amount outstanding of EUR 1 billion, with additional Freedom House and ESG risk category screenings. Exhibits 2 and 3 show how these indices compare to the wider iBoxx Eurozone benchmark.

With a narrower issuer universe, the green bond strategy shows higher deviation in the country compositions compared to the iBoxx EUR Sovereigns ESG Tilted, narrowing issuers to eight countries. The index also exhibits higher yield with a higher duration exposure (see Exhibit 1).

Emerging Markets: Additional Measures

In addition to the above eurozone benchmarks, our sustainable indexing approach to emerging markets debt, the iBoxx MSCI ESG USD EM Sovereigns Quality Weighted Index, takes further fundamental metrics into consideration, in addition to a positive ESG score. These key criteria include GDP per capita, GDP growth trajectory, inflation, national debt and reserve levels, global competitiveness and the history of default. Given an increased number of parameters taken into consideration in the index construction, the index statistics and performance differ more notably from its broad benchmark, the Markit iBoxx USD Emerging Markets Sovereigns Index. The index weights shuffle substantially (see Exhibit 4) with the ESG version taking on slightly more duration (see Exhibit 1).


For index-based investing, the sustainability overlay in sovereign debt is likely to continue expanding and evolving. As the solutions continue to grow, they can borrow from the development of the corporate benchmarks, like ESG scores, impact investing or climate considerations metrics. However, it is important to recognize that the government debt category demands a distinct approach, with consideration of different criteria and construction methods. Amid the ongoing transitions in the sustainability landscape this year, the government debt ESG category will remain an interesting point of discussion for months to come.


1 Sustainalytics Country Risk Score.

2 Freedom House Scores.

3 Climate Bond Initiative.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Global Islamic Indices Gained over 7.5% in Q2 2023, Outperforming Conventional Benchmarks YTD

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John Welling

Director, Global Equity Indices

S&P Dow Jones Indices

Global equities ended the second quarter of the year with a gain of 6.0%, as measured by the S&P Global BMI, accumulating gains of 13.4% YTD. Shariah-compliant benchmark returns, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, outperformed their conventional counterparts by about 1.5% during the quarter, building on momentum from the first quarter of the year.

Regional broad-based Shariah and conventional equity benchmarks had a positive quarter across the board. The Shariah-complaint developed markets benchmark stood out for its performance against the conventional benchmark YTD, while the Shariah-compliant emerging markets index stood out as an exception to the performance trend and continued to lag the conventional benchmark (see Exhibit 1).

Drivers of Shariah Index Performance YTD in 2023

Shariah benchmarks continued to outperform their conventional counterparts YTD, in contrast to 2022 returns. Sector composition can provide some explanation for the results during this period. A higher exposure to Information Technology stocks within Islamic indices and no exposure to conventional financial services including banks, were the main drivers of this outperformance. The Information Technology sector was up nearly 39% and represented nearly one-third of the index weight, driving the highest return contribution among all sectors (see Exhibit 2).

Meanwhile Communication Services and Consumer Discretionary also had outsized returns among sectors, which contributed significantly to the index’s outperformance despite lower representation in comparison to the largest sectors.

Energy and Utilities were the only sectors that decreased YTD. The impact from these was limited by their small weights.

MENA Equities Turn Around in Q2 2023

Following negative performance during Q1, MENA equities gained nearly 6% during Q2, as measured by the regional S&P Pan Arab Composite. GCC country performance largely followed suit, with positive returns for Saudi Arabia (8.0%), UAE (6.3%) and Kuwait (0.1%), while Bahrain surged (13.8%). Meanwhile, Qatar (-1.3%) and Oman (-0.3%) posted losses.

For more information on how Shariah-compliant benchmarks performed in Q2 2023, read our latest Shariah Scorecard

This article was first published in IFN Volume 20 Issue 28 dated July 12, 2023.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Follow the ESG Leaders

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Maya Beyhan

Senior Director, ESG Specialist, Index Investment Strategy

S&P Dow Jones Indices

The S&P 500® ESG Leaders Index is constructed using securities from the S&P 500 ESG Index that meet stricter sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.1 The S&P 500 ESG Leaders Index takes its underlying index up a notch by applying additional exclusionary screenings based on business activities such as shale energy, nuclear power, alcoholic beverages and gambling.

Previously, we performed a real-world performance test for the S&P 500 ESG Index’s improved sustainability profile, after nearly four years since the index’s launch. From its launch date until the end of June 2023, the S&P 500 ESG Index outperformed its benchmark, the S&P 500, by a cumulative 13.3% (impressive in the context of a benchmark that is notoriously hard to beat). We found out that underweighting the lowest ESG-scoring constituents contributed the most to the S&P 500 ESG Index’s outperformance.

Now, taking a closer look at the S&P 500 ESG Leaders Index with its live performance data approaching 18 months since its launch, it also outperformed the S&P 500, by a cumulative 2.7%. But given the S&P 500 ESG Leaders Index is designed to meet stricter sustainability criteria than the underlying S&P 500 ESG Index, how important were higher or lower ESG-scoring constituents in generating this excess return? Were there similar patterns as the S&P 500 ESG Index’s outperformance?

To measure this, we adopted a similar approach as we did for the S&P 500 ESG Index and created hypothetical ESG “quintile portfolios,” reconstituted annually by ranking the S&P 500’s constituents by their ESG score and assigning each to one of five portfolios, from highest to lowest ESG score. The hypothetical cap-weighted performance of these portfolios was then calculated and used to create a Brinson-like2 “ESG attribution,” teasing out the importance of ESG exposures in the returns of the S&P 500 ESG Leaders Index.

Exhibit 1 summarizes the results of this analysis, including the average weights of the S&P 500 ESG Leaders Index and the S&P 500 in each ESG quintile (from high to low scoring), the corresponding portfolio and index returns, as well as a summary of the corresponding allocation and selection effects over the full period.3

The allocation, selection and total effects from over- and underweighting across and within the ESG quintiles was positive in every quintile. Underweighting the lowest ESG-scoring constituents, on average, contributed 0.21% to the S&P 500 ESG Leaders Index’s outperformance. But the highest ESG-scoring constituents also contributed a significant proportion of the S&P 500 ESG Leaders Index’s relative performance. The High ESG Quintile 1 and Q2 outperformed the S&P 500 by 1.9% and 3.1%, respectively, and the S&P 500 ESG Leaders Index overweighted these quintiles by an average of 9.1% and 4.9%, respectively, leading to a total contribution of 0.34% from allocation effects to these top quintiles.

Drilling down, Exhibit 2 compares the performance of the lowest and highest ESG quintiles to the S&P 500 since the launch of the S&P 500 ESG Leaders Index and two further sub-periods. The second highest ESG-scoring quintile (Q2) outperformed consistently in 2022 and YTD in 2023. The Low ESG Quintile (Q5) underperformed by 7.8% in 2022 but outperformed by 8.1% YTD. Underweighting this quintile contributed positively to relative index performance in 2022.

Exhibits 1 and 2 together show that, in short: the S&P 500 ESG Leaders Index methodology of seeking the best-scoring constituents, as well as avoiding the worst-scoring constituents, worked in its favor overall.

Market participants sometimes consider ESG as being about avoiding the “worst.” The S&P 500 ESG Leaders Index’s outperformance since launch suggests that there may be value in following the leaders, too.

Performance drivers surely do change over time. Investors can utilize ESG-based attribution analysis such as these to gain insight and perspective as markets and conditions evolve. Similar attributions for our range of flagship indices are now available—updated as of the most recent quarter-end—in S&P DJI’s Sustainability Index Dashboard.

Register here to receive quarterly insights and performance attributions for our range of flagship sustainability and climate indices.


1 How & Why the S&P 500 ESG Leaders Index Work

2 Similar to our previous analysis with Carbon Quintiles, the quintile portfolios are each assigned an equal number of benchmark constituents, and the impact of weighting to stocks with higher or lower ESG scores is measured analogously to the way sector or country effects are measured by a traditional Brinson attribution.

3 Analysis carried out using the Portfolio Analytics tool on S&P Capital IQ Pro.

The posts on this blog are opinions, not advice. Please read our Disclaimers.