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Why Multi-Factor Indices in South Africa?

Balancing Defense with Growth: The S&P Quality Indices

4 Ways to Compare Asian and U.S. Dividend Markets

Dividends and Option Premiums: A Dual Income Story

Hot Temperatures and a Hot Start to the Second Half of 2023 for Commodities

Why Multi-Factor Indices in South Africa?

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Elizabeth Bebb

Director, Factor & Dividend Indices

S&P Dow Jones Indices

Burton Malkiel, author of the book A Random Walk Down Wall Street, asserted, “The facts suggest that successful market timing is extraordinarily difficult to achieve.”1

Multi-factor indices may be a way of ensuring you are “in the right place at the right time,” participating throughout market cycles without compromising timing or returns.

The S&P DJI Multi-Factor Indices are built on a bottom-up methodology. This means the factor scores are combined to select “all-rounders” that score highly across multiple factors. The S&P South Africa Composite Quality, Value & Momentum (QVM) Multi-factor Index utilizes the Quality, Value and Momentum factors. The illustration below shows the metrics used in the scoring for each individual factor.

To be eligible for inclusion in the S&P South Africa Composite QVM Multi-factor Index, the constituents must be members of the S&P South Africa Composite and pass a trading liquidity screen. Multi-factor scores are calculated for each company based on the average for each factor. The top 40 constituents with the highest factor score are included in the index. All constituents are market capitalization times factor score weighted, to a maximum weight of 10%.

The methodology enables various benefits to be built into the index. Stocks are selected within the context of the total combined portfolio and overall exposures to the desired factors may be higher. Additionally, back-tested results show stronger risk-adjusted returns than the index of indices approach.

Multi-factor indices have historically tended to perform more strongly over the longer term on a risk-adjusted basis. This improved dynamic is demonstrated by returns being closer to the top left in Exhibit 2. The S&P South Africa Composite QVM Multi-factor Index is nearer this point than other indices.

We show the S&P South Africa Composite QVM Multi-factor Index returns on a yearly basis with the individual factor returns overlaid in Exhibit 3. The S&P South Africa Composite QVM Multi-factor Index line demonstrates how the individual factor returns are working together over various years to deliver the risk-adjusted return.

The correlations across excess returns between factors are low, which allows for the potential benefits from combining individual factors within the S&P South Africa Composite QVM Multi-factor Index approach.

Exhibit 5 shows the risk-adjusted returns over time for each of the factors. The S&P South Africa QVM Multi-factor Index provides good returns over the long-term with lower tracking error against the S&P South Africa Composite. It also participates well in rising markets but avoids some of the downside in falling markets, reflecting the benefits of the multi-factor approach.

The S&P South Africa Composite QVM Multi-factor Index provides an interesting opportunity to consider for multi-factor indexing in the South African market.

1 Malkiel, Burton. A Random Walk Down Wall Street. W. W. Norton & Company, Inc. 1973.

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

Balancing Defense with Growth: The S&P Quality Indices

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Wenli Bill Hao

Director, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

Thus far this year, about two-thirds of the S&P 500®’s rally has been driven by growth stocks and the so-called “Magnificent Seven” tech stocks. While the quality factor is traditionally viewed as defensive, it has kept pace with the market while many other factor strategies have underperformed (see Exhibit 1). Part of the reason for this is the focus on companies with solid fundamentals, which has been able to capture growth names that are financially strong.

Methodology Overview

High quality is commonly associated with a company’s strong profitability, high earnings quality and robust financial strength. Hence, the S&P Quality Indices utilize three prominent metrics to capture a company’s quality characteristics (see exhibit 2): return-on-equity (ROE), balance sheet accruals ratio (BSA) and financial leverage ratio (FLR).

The selection for the S&P Quality Indices corresponds to the top 20% of eligible stocks within their respective universe, ranked by their overall quality scores. Index constituents are weighted by the product of their market capitalization and quality scores, subject to constraints.1

Performance Comparison

Historically, the S&P Quality Indices outperformed their corresponding benchmarks in the short and the long term with respect to total return and risk-adjusted return (see Exhibit 3). Year-to-date, the S&P MidCap 400® Quality Index and S&P SmallCap 600® Quality Index outperformed their benchmarks by 8.55% and 6.46%, respectively.

Additionally, these indices have tended to exhibit defensive qualities, as evidenced by lower volatility, lower beta and smaller drawdowns.

YTD Quality Index Performance Attribution

Thus far in 2023, the financial leverage ratio (FLR) component has significantly outperformed the S&P 500 (see Exhibit 4), suggesting that markets may have rewarded lower leveraged companies on the back of high interest rates.

High Upside Participation and Defensive Characteristics

The historical capture ratios in Exhibit 5 show that the S&P Quality Indices tend to participate one for one in up markets2 while delivering significant outperformance during down markets. The defensive nature of these indices makes sense since the quality factor tends to track companies with durable business models and sustainable competitive advantages.

For the S&P 500 Quality Index, these capture ratios may be partially explained by the selection of mega-cap growth stocks, which tend to have strong financials and underlying business fundamentals. The recent constituents include five (Apple, Microsoft, Nvidia, Alphabet and Meta) of the Magnificent Seven. Exhibit 6 shows the top 15 contributors to the S&P 500 Quality Index’s performance YTD.

Factor Exposure

Exhibit 7 shows the factor exposure difference between quality indices and their benchmarks in terms of Axioma Risk Model Factor Z-scores. The S&P Quality Indices demonstrated a strong quality tilt versus their respective benchmarks. Specifically, the quality indices had higher exposure to profitability and lower exposure to leverage ratio factors. Additionally, the indices had similar valuation and growth exposures to their benchmarks.

Sector Composition

Exhibit 8 shows the historic sector exposure difference between the quality indices and their benchmarks. Historically, the quality indices were overweight in Industrials and Technology, while underweighting Communication Services, Energy, Financials, Real Estate and Utilities.

1 For further information about the factor definition, factor score calculation and index design, please see the S&P Quality Indices Methodology.

2 The market is defined as the monthly performance of the underlying benchmarks from Dec. 31, 1994, to July 31, 2023.

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

4 Ways to Compare Asian and U.S. Dividend Markets

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Henry Greene

Investment Strategist


Dividends are becoming increasingly important as investors grapple with higher U.S. Treasury yields that do not appear to be going down anytime soon. However, not all dividend markets are created equal. Below are four charts that compare dividend index performance in Asia to the U.S.

The S&P Pan Asia Dividend Aristocrats Index brings S&P Dow Jones Indices’ notable “Dividend Aristocrats®” index methodology to Asia. The index selects companies in both emerging and developed Asian economies that have increased their dividends every year for at least the past seven years. Please click here for the full index methodology and here for more dividend-related research from KraneShares.

1. Momentum

The S&P Pan Asia Dividend Aristocrats Index has outperformed the S&P 500® Dividend Aristocrats Index, which tracks dividend growers in the U.S., so far this year, gaining 8.09% versus 3.97% for its U.S. counterpart, as of June 20, 2023.

2. Yield

S&P Pan Asia Dividend Aristocrats Index constituents also currently offer a higher dividend yield, on average, than their U.S. counterparts.

3. Valuation

S&P Pan Asia Dividend Aristocrats Index constituents are currently trading at nearly one half of the price-to-earnings multiple of their U.S. counterparts, on average.

4. Correlation

S&P Pan Asia Dividend Aristocrats constituents have also exhibited relatively low correlations to the broad U.S. equity market and the S&P 500 Dividend Aristocrats Index constituents, which may present additional portfolio benefits over the long term.


S&P 500 Dividend Aristocrats Index: The S&P 500 Dividend Aristocrats Index measures the performance of S&P 500 companies that have increased their dividends every year for the last 25 consecutive years. The index treats each constituent as a distinct investment opportunity without regard to its size by equally weighting each company. The index was launched on May 2, 2005. See full methodology here.

S&P Pan Asia Dividend Aristocrats Index: The S&P Pan Asia Dividend Aristocrats Index measures the performance of constituents within the S&P Pan Asia Broad Market Index (BMI) that have followed a policy of consistently increasing dividends every year for at least seven years. The index was launched on April 14, 2009.

S&P 500: The S&P 500 is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization. The index was launched on March 4, 1957.

S&P Pan Asia Broad Market Index (BMI): The S&P Pan Asia BMI is a sub-index of the S&P Global BMI and a comprehensive benchmark including securities from developed and emerging Asia. The index was launched on Dec. 31, 1997.

Dividend Yield: The percentage of a company’s share price that said company pays out in dividends each year.

Price-to-Earnings Ratio (P/E): A measure of whether a company is over or under-valued. P/E is calculated as a company’s price per share divided by its earnings per share.

Earnings Per Share (EPS): The total revenue of a company divided by the number of shares outstanding.

Correlation: Correlation is a statistic that measures the degree to which two securities move in relation to one another. Correlations are shown here as the correlation coefficient, which is a value that must fall between -1 (inverse correlation) to 1 (absolute correlation).


The S&P 500®, S&P 500 Dividend Aristocrats Index, S&P Pan Asia Dividend Aristocrats Index and S&P Pan Asia Broad Market Index are products of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”).  S&P®, S&P 500®, Dividend Aristocrats® are trademarks of S&P Global, Inc. or its affiliates (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).  Kraneshares ETFs based on SPDJI’s indices are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates or licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions or interruptions of the Indices.


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

Dividends and Option Premiums: A Dual Income Story

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Maxime Fouilleron

Analyst, Multi-Asset Indices

S&P Dow Jones Indices

Income generation may be sought out by a variety of market participants, including those nearing retirement and those seeking a source of passive income. An income-focused strategy requires a different approach to those focused on generating growth. Traditional sources of income include dividend-paying stocks and coupon-paying bonds. The economic landscape of the past 18 months has been shaped by persistent inflation, rising interest rates and general market uncertainty, all of which have negatively affected the performance of these traditional strategies.

To help diversify risk and add incremental income, market participants might look for non-traditional sources of income generation such as a covered call strategy. The Dow Jones U.S. Dividend 100 3% Premium Covered Call Index and the Dow Jones U.S. Dividend 100 7% Premium Covered Call Index are designed to measure the performance of a long position in high-dividend-yielding stocks and a short position in a standard S&P 500® monthly call option.

The underlying equity index used for the Dow Jones U.S. Dividend 100 Covered Call Indices is the Dow Jones U.S. Dividend 100 Index, which measures the performance of high-dividend-yielding U.S. stocks. Since 2006, the Dow Jones U.S. Dividend 100 Index has posted an average dividend yield of 3.88% (see Exhibit 1), comfortably outperforming the S&P 500 Dividend Aristocrats® (2.58%) and the S&P 500 (1.95%).

A covered call strategy involves selling a call option on a long equity position. If the asset’s market price exceeds the option’s strike, a rational option buyer would exercise the contract and obligate the option writer to sell the asset or settle in cash. The main potential benefits of this strategy are the cash flow generated from writing the calls—option premiums—and the limited downside protection that the premiums can provide. Similarly to dividends, the cash flow received from option premiums can mitigate the effects of down markets. The main drawback of a covered call is the limited upside potential of the equity position. Covered call strategies are particularly relevant during volatile market conditions. Option premiums tend to increase as volatility rises, offering the potential for greater income generation and added downside protection.

What makes the Dow Jones U.S. Dividend 100 3% Premium Covered Call Index and the Dow Jones U.S. Dividend 100 7% Premium Covered Call Index unique is that they combine a traditional dividend-paying income strategy and a non-traditional covered call approach. Both indices reflect the same dividend yield as the underlying Dow Jones U.S. Dividend 100 Index, which has averaged 3.88% since 2006. In addition, each index targets a specific premium yield of 3% and 7%, respectively.

Historically, these indices have adjusted their coverage ratios and successfully achieved their target yields (see Exhibits 3 and 4). The coverage ratio is defined as the notional value of the short call position as a fraction of the long equity notional amount. For example, a coverage ratio of 100% means that calls were written against the entire value of the long equity position, while a coverage ratio of 25% signifies that the value of the calls represents one-fourth of the equity position. The dynamic nature of the coverage ratio provides the index with some downside protection (from the covered short position) as well as exposure to equity upside (from the uncovered long equity position).

For market participants searching for two sources of income, adding a covered call overlay may provide incremental income beyond what could be accessed from a purely dividend-paying equity index. The option for target yields of 3% or 7% provides the ability to choose the ideal upside potential.

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

Hot Temperatures and a Hot Start to the Second Half of 2023 for Commodities

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Jim Wiederhold

Former Director, Commodities and Real Assets

S&P Dow Jones Indices

The S&P GSCI, the broad commodities benchmark, started the second half of the year in a blistering heat wave and rose 11% on the back of petroleum commodities, which all increased by more than 14% in July. The remaining four sectors within the S&P GSCI also rose during the month, as fears of a recession abated with inflation falling and the Fed possibly getting close to ending their rate hiking cycle. Strong inflows into commodity ETFs and the covering of short positions across individual commodities helped to create a potential bottom in a few key commodities futures markets.

The energy sector completely reversed its underperformance from the first half of the year, bringing all commodities into positive territory for 2023. OPEC+ production cuts and the absence of negative economic data helped to lift the fossil-fuel-based commodities in July. Demand for petroleum has remained strong during the energy transition, as the world continues to rely on old ways to fuel the economy, as can be seen by strong import demand across nations, particularly in Asia. The S&P GSCI Gasoil and the S&P GSCI Heating Oil were the standouts for the month, rising 23.8% and 22.9%, respectively.

The S&P GSCI Industrial Metals rose 6.5% with all five of the top-traded metals rising in July. For the past few months, Commodity Trading Advisors (CTAs) had large short positions in the space, but short covering in July led to a strong bounce off the lows for several key metals, which have posted some of the worst YTD performance rates in the commodities markets.

Another source of positive news came from the precious metals sector. The S&P GSCI Gold was up 8.1% YTD, as market participants positioned for future U.S. dollar weakness with expectations for the Fed to end their rate hiking cycle soon. Central banks across the globe have increased their gold reserves recently at a pace not seen in years, which typically prefaces a rise in gold prices. The S&P GSCI Silver joined the party by rising 9.0% in July and moving into positive territory for the year. This typically happens as silver tends to track gold moves higher, but with a lag.

The S&P GSCI Agriculture grew by a modest 3.0%, while the S&P GSCI Wheat and the S&P GSCI Corn rose the most as concerns over the latest crop yields were prominent. A recent S&P Global post highlighted the potential for China to have reached peak food demand. China is the biggest consumer of grains globally, but the World Bank recently forecasted that after decades of strong growth, their population will fall by 80 million people over the next 25 years. Could this lead to less demand, or will new areas of demand, such as in more environmentally friendly biofuels, spur new global consumption to supplant the drop in the food needs of China over time?

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