Indexology^® Blog

Which factors weathered the mega-cap slump that dragged The 500™ down in February? Explore highlights from the latest SPIVA U.S. Scorecard and the defensive factors standing up to challenging markets.

What’s powering the latest innovations in thematics? S&P DJI’s Head of Thematic Indices, Ari Rajendra, and Invesco’s Head of EMEA ETF Equity Product Management, Chris Mellor, discuss the rise of thematic investing and how AI and NLP technologies are sharpening the tools tracking transformative trends.

GARP (growth at a reasonable price) has long been a staple investment strategy, but it was popularized by investing legend Peter Lynch after the Magellan Fund posted a remarkable average annual return of 29.2% from 1977 to 1990.¹ As the name implies, it’s a strategy that seeks to strike a balance of tracking stocks with both growth and value characteristics. While the S&P 500^® GARP Index has historically outperformed over the long term, its recent underperformance relative to the S&P 500 in 2024 has led to a situation where it is no longer trading at a “reasonable” price, but rather at a “historically cheap” price relative to The 500™. Interestingly, this blog will reveal that the current valuation disconnect occurs during a period of particularly strong fundamental performance factors for the S&P 500 GARP Index.

Valuation Comparison

Exhibit 1 illustrates the historical trailing 12-month price-to-earnings (P/E) ratio discount of the S&P 500 GARP Index relative to The 500 since June 1995. As of Jan. 31, 2025, the current discount is 51.0%, attributed to The 500’s P/E ratio of 28.3 compared to the S&P 500 GARP Index’s P/E ratio of 13.9.

As Exhibit 1 shows, the discount has historically tended to mean revert when reaching extended levels, with another notable divergence occurring in June 2000 when the discount peaked at 59% near the Tech Bubble. In the one-, three- and five-year periods following June 2000, the S&P 500 GARP Index outperformed The 500 by 25%, 45% and 78%, respectively.

Growth Comparison

Exhibit 2 shows that the S&P 500 GARP Index’s 2024 operating earnings per share (EPS) growth rate is in line with its five-year median of 12.3%. Both figures indicate a significant premium compared to the operating EPS growth rates of The 500 and the S&P 500 Equal Weight Index in 2024. The five-year median is presented instead of the average due to the volatility of operating EPS, particularly during the 2020-2022 COVID-19 period, which can distort the average calculation.

Quality Comparison

The same trend observed in the operating EPS growth comparison is evident in the quality comparison as well. As shown in Exhibit 3, the S&P 500 GARP Index’s 2024 return on assets (ROA) of 4.9% is 24% higher than its five-year average of 3.9%. In comparison to The 500 and the S&P 500 Equal Weight Index, this 4.9% ROA reflects a 31% and 100% increase, respectively.

The S&P 500 GARP Index’s 2024 return on equity (ROE) of 17.0% is 10% above its five-year average and is closely aligned with The 500’s 2024 ROE of 17.3% (see Exhibit 4). Compared to the S&P 500 Equal Weight Index’s ROE of 11.0%, the S&P 500 GARP Index’s ROE reflects a 54% premium.

Conclusion

Despite its notable valuation discount, the S&P 500 GARP Index’s 2024 fundamental performance—assessed through growth and quality metrics—was strong compared to both its benchmarks and its historical performance. The S&P 500 GARP Index demonstrated strong fundamental performance in 2024 while simultaneously trading at one of its widest valuation discounts since the Tech Bubble peak in 2000.

1. “Betting on the Market Pros: Peter Lynch.” PBS.

While the market offers many dividend strategies, few incorporate dividend forecasts to provide a forward-looking assessment. The S&P 500^® High Dividend Growth Index utilizes the industry-leading S&P Global Dividend Forecasting dataset to select constituents from the S&P 500 that are projected to have the highest dividend yield growth. This innovative index applies a unique methodology, tracking companies based on a dividend growth score calculated by subtracting 12-month trailing yield from the 12-month forecasted yield.

Launched on Oct. 23, 2023, the S&P 500 High Dividend Growth Index has made a strong start, outperforming other well-known dividend indices. Furthermore, it has historically shown higher dividend yields and dividend growth rates than The 500™.

In this blog, we will examine the historical characteristics of this index, including its risk/return profile, dividend yield and dividend growth rate. We will also assess its dividend contributions over time and review its sector allocations throughout the years.

Performance since Launch

The S&P 500 High Dividend Growth Index has outperformed other leading dividend strategies both YTD and since its launch, posting returns of 5.75% and 30.51% over those periods, respectively. Exhibit 1 shows that in 2024, the index posted strong performance with a 16.26% return, outperforming most dividend strategies.

Similarly, the S&P 500 High Dividend Growth Index has exhibited solid performance in line with its benchmark, which is not an easy feat given the recent strong performance of mega-cap stocks.

Long-Term, Back-Tested Performance

Since 2010, which includes back-tested performance, the S&P 500 High Dividend Growth Index has posted a robust annualized return of 13.54% and a risk-adjusted return of 0.75. The S&P 500 High Dividend Growth Index’s performance has closely aligned with The 500, a notable achievement given the dominance of growth-oriented stocks over the past decade (see Exhibit 2).

Dividend Yield

As shown in Exhibit 3, the dividend yield of the S&P 500 High Dividend Growth Index consistently outpaced the dividend yield of The 500 from 2011 to 2025. On average, the S&P 500 High Dividend Growth Index’s dividend yield was 3.09%, outperforming The 500’s dividend yield (of 1.82%) by 1.27%.

Dividend Growth Rate

From 2011 to 2025, the S&P 500 High Dividend Growth Index and The 500 grew their dividends at annual rates of 10.6% and 8.8%, respectively. More recently, from 2023 to 2025, the S&P 500 High Dividend Growth Index’s dividend growth rate was 8.7%, surpassing The 500’s 6.5% rate (see Exhibit 4).

Dividend Contributions

As displayed in Exhibit 5, dividends contributed a greater percentage to the total return of the S&P 500 High Dividend Growth Index than to the total returns of the market-cap and equal-weight benchmarks, as well as style indices like value and growth. Notably, the dividend contributions of the S&P 500 High Dividend Growth Index were 9.8 percentage points higher than those of The 500.

Sector Weights

Exhibit 6 shows how the sector weights of the S&P 500 High Dividend Growth Index have changed over time. On average, the largest sector weights in the index have been Financials, Industrials, Utilities and Information Technology. For a dividend strategy, the weights across the sectors have been overall balanced.

Conclusion

The S&P 500 High Dividend Growth Index combines forward-looking and historical metrics for constituent selection. Its innovative design has historically delivered higher dividend yields and growth rates than its benchmark, all while maintaining strong total returns. Although this index has only been live for just over 12 months, it is noteworthy that it has outperformed similar high dividend yield and dividend growth indices by posting strong returns over this period.

S&P Dow Jones Indices (S&P DJI) has been calculating indices designed to exclude companies with fossil fuel reserves since December 2011, when the S&P Global 1200 Fossil Fuel Reserves Free Index was launched. This index, along with its sub-indices such as the S&P 500^® Fossil Fuel Reserves Free Index, measure the performance of companies in their respective underlying benchmark that do not own fossil fuel reserves. As such, these indices may be considered by investors who seek benchmarks to reflect a strategy that divests from fossil fuel reserves.

In July 2024, S&P DJI launched the S&P/TSX Composite Fossil Fuel Reserves Free Index, furthering the relationship between S&P DJI and TMX Group. Similar to the already available S&P/TSX 60 Fossil Fuel Reserves Free Index, this new benchmark follows the same methodology rules as others in the series, but applies them to the broader universe of the S&P/TSX Composite. The index is a benchmark for the broad Canadian equity market that excludes companies with fossil fuel reserves.

Regarding index construction, stocks from the starting universe, in this case the constituents of the S&P/TSX Composite, are screened as seen in Exhibit 1 to exclude those companies with exposure to fossil fuel reserves. Within this approach, the index uses 2P or “proven and probable” reserves as a proxy for exposure, which are those with more than a 50% probability of being recovered. The index is rebalanced quarterly to ensure regular data updates, and it is float-market-cap weighted in an effort to closely reflect the composition of the benchmark.¹

As a result of applying these screens, the index composition does change slightly when compared to the benchmark, the S&P/TSX Composite. In terms of GICS^® sectors, we observe an underweighting of Energy owing to the fossil fuel reserves exclusions, with a corresponding overweighting of Financials to compensate. There are also other slight overweights across the board (see Exhibit 2).

In terms of constituent make up, the exclusions lead to a slightly greater concentration of the top 10 constituents of the S&P/TSX Composite Fossil Fuel Reserves Free Index versus the benchmark. As Exhibit 3 shows, the top 10 stocks collectively have a greater weighting within the fossil fuel reserves free index, owing to fewer stocks to select from given the applied exclusions.

The index screens out stocks utilizing S&P Global Trucost environmental data specific to fossil fuel reserves. The screening results in a total of 32 stocks being excluded, representing 9.61% of the benchmark weight as of Jan. 29, 2025.

Historically, the index has exhibited similar risk/return characteristics as the benchmark. As shown in Exhibit 4, when looking at back-tested data, the index maintained similar performance to the benchmark over the 10-year period.

The S&P/TSX Composite Fossil Fuel Reserves Free Index also had a relatively low tracking error over the 10-year period, just 0.69% when compared with the benchmark.

In summary, the S&P/TSX Composite Fossil Fuel Reserves Free Index has historically matched the performance of its benchmark closely, while excluding companies with exposure to fossil fuel reserves. With a number of index-based approaches to climate change-related considerations currently available, this index and its broader series represent one strategy where market participants can gauge the performance of companies, while excluding those with exposure to fossil fuel reserves.

¹ For the full methodology, please see: S&P/TSX Fossil Fuel Reserves Free Indices – Methodology