Indexology^® Blog

At one point deep into the Global Financial Crisis of 2008, I remember a clever colleague declaring “less down is the new up.” He wasn’t alone in this point of view, since in a world with so many markets and indices falling in unison, those that performed relatively better justifiably gained attention. One of those standouts at the time was the S&P 500^® Low Volatility Index (“Low Vol”).

Nearly two decades have passed since then, and Low Vol has continued to stand out during downturns, including 2025’s market swoon, as shown in Exhibit 1.

This isn’t unusual; Low Vol has a track record of losing less, while still participating in upside, in a pattern often referred to as the “low volatility anomaly.” Researchers call this factor’s performance an anomaly since it defies conventional economic theory about the positive relationship between return and risk. Explanations for this breakdown in the risk/return relationship center around mispricing (more precisely, underpricing) of lower-risk stocks and overpricing of higher-risk stocks due to a mix of behavioral, structural and economic drivers.

By design, the Low Vol index has historically delivered less risk than the S&P 500, with an annualized volatility of 11.6% compared to 15.3% for The 500™ and a lower beta (0.7) over the 25 years ending March 2025. Lower volatility and beta come from capturing less of the ups and downs of market movers, but in the case of Low Vol, this rate of capture is not symmetrical. Looking again at the 25-year period ending in March 2025, we calculated monthly upside and downside capture ratios for Low Vol relative to The 500, as shown in Exhibit 2.¹

The observed upside and downside capture characteristics of Low Vol have played out in real time to various degrees of magnitude through expansions and downturns over the last 25 years. In recent months, the factor has appeared to show relative resilience once again, as illustrated by Exhibit 3’s chart showing rolling one-year excess performance versus The 500.

It is clear from Exhibit 3 that the recent performance differential between Low Vol and The 500, while noteworthy, is not without precedent and indeed has been surpassed during previous crises. Suffering less downside, on average, than the S&P 500, but participating slightly more during rebounds, repeated again and again, has historically led to a widening margin of cumulative outperformance for Low Vol versus The 500 over the last 25 years, as shown in Exhibit 4. On an annualized basis, the S&P 500 Low Volatility Index rose 9.9% per year compared to 7.0% for The 500.

Measures of risk, rolling performance and average upside/downside capture shed light on the persistent characteristics of S&P 500 Low Volatility Index, but viewing them together tells a longer-term story about the anomalous power of a defensive stance historically.

¹  Upside and downside capture ratios are based on monthly performance of the S&P 500 Low Volatility Index relative to the S&P 500 from March 2000, to March 2025 and are capped at no more than 100% and no less than 0%.

Life has been a little eventful since we last checked in. Under normal circumstances, this blog would review March and Q1 performance of S&P 500^® sectors and blends. Yes, tariffs are the elephant in the room we’ve been unable to avoid all year, but as of April, that elephant seems to have invited the rest of the herd inside for a rampage.

In April, the tariff narrative went global, sparking a 10.5% drop in The 500^TM over the course of two days, the steepest two-day decline since the dawn of the COVID-19 pandemic in March 2020. As shown in Exhibit 1, no sector was spared from the pain over the first week of April, with performance ranging from a 3.8% drop for Consumer Staples to Energy’s 15.3% fall.

Although every sector declined YTD in April, not all fell as much as the broader market. At any given time, at least one sector must be outperforming the others, with historically cyclical and defensive sectors faring better or worse depending on market direction. In a previous blog, we illustrated the relative performance of cyclical and defensive blends of sectors through the first two months of 2025, using a simple methodology of creating two blends that combine five higher-risk or five lower-risk sectors, as discussed in recent research.¹

In Exhibit 2, we show daily excess returns of each five-sector blend (cyclical and defensive) for every trading day of 2025, through April 4.

Two observations might stand out from this plot, one quite intuitive and the other perhaps more curious. First, the upward sloping trend of the cyclical data points and the downward slope of the defensive blend data illustrate that each has had a historical tendency to directionally outperform in markets where we would expect them to. Second, the spread of excess performance outcomes for the cyclical blend appears more tightly grouped than that of the defensive blend. Why might this be so?

The answer is that cyclical sectors are where we find most of the Magnificent 7, which have been responsible for a disproportionate share of The 500’s decline. More precisely, while the Magnificent 7 averaged 31.9% of total weight in the benchmark YTD through April 4, they were responsible for contributing more than half of the benchmark’s decline over the same period. Many of these stocks were already on unsteady ground after disruption of the AI competitive landscape in Q1, and now that tariffs have been announced to be broader and larger than anticipated, their sectors’ higher-than-average foreign revenue exposure has caused a new wave of worries.

Exhibit 3 illustrates the weight of each blend in The 500 and the proportion of Magnificent 7 weight in each, suggesting that the cyclical blend’s fortunes may be more closely (but not entirely) tied to those of the largest stocks in the benchmark, which would make relative outperformance more constrained when those large stocks lead performance up or down.

Despite this concentration of mega-cap stocks in the cyclical blend, it has still managed to slightly outperform The 500 by 0.3% YTD, as shown in Exhibit 4. Of course, the defensive blend has withstood the barrage even better, outpacing the benchmark by 9.9%.

¹  Cyclical and defensive blends are composed of the top five and bottom five sectors as ranked by historical beta and volatility. Real Estate, ranked in the middle of the 11 S&P 500 sectors, is excluded from this analysis.

Until recently, the continuous rise of the S&P 500^® seemed unstoppable. However, with the return of market volatility and macroeconomic uncertainty, there has been a growing appetite for defensive strategies and risk mitigation.

The S&P 500 Low Volatility Index has emerged as a standout performer, further solidifying its reputation for stability in uncertain times. This index tracks the 100 companies within the S&P 500 with the lowest volatility and has demonstrated significant outperformance YTD. As of April 4, 2025, the index was up 0.5%, surpassing the S&P 500 by 14.0%. Since the market’s peak on Feb. 19, 2025, to April 4, 2025, the index was down 3.7%, while the S&P 500 was down 17.3% (see Exhibit 1).

Diversified Approach to Risk Mitigation

Beyond its defensive stance, this index offers a diversified approach to risk mitigation by reducing exposure to mega-cap stocks and increasing weight to defensive sectors such as Utilities and Consumer Staples (see Exhibit 2). This positioning has contributed to its recent outperformance, which can be attributed to a combination of allocation and selection effects.

Domestically Biased Revenue Exposure

Another factor potentially contributing to the recent outperformance of the S&P 500 Low Volatility Index is the higher proportion of revenue generated by its constituents within the U.S. Exhibit 3 illustrates the weighted-average revenue exposure of the index compared to its benchmark. On average, the constituents of the S&P 500 Low Volatility Index derived 72.60% of their revenue from the U.S., in contrast to 59.67% for the S&P 500.

Defensiveness from a Long-Term Perspective

The S&P 500 Low Volatility Index has a track record of outperforming the broader market during significant drawdown events. As illustrated in Exhibit 4, the index consistently outperformed during most major drawdowns since the late 1990s.

Moreover, this index’s defensive approach has not hindered its long-term return potential. As illustrated in Exhibit 5, since 1990—including some back-tested performance—the index has nearly matched the performance of the S&P 500, underscoring its long-term credentials.

Performance in Different Market Conditions

Exhibits 6 and 7 show the performance of the S&P 500 Low Volatility Index in different market and macroeconomic conditions. The defensive qualities of the index are here further showcased, as the index overperformed the benchmark in periods of market stress and in macroeconomic environments of falling GDP growth.

Conclusion

By focusing on stocks with the lowest volatility, the S&P 500 Low Volatility Index has recently shown robust outperformance relative to the broader market. Its diversified exposure to defensive sectors, bias towards domestically oriented stocks, coupled with reduced reliance on mega-cap ones, has also significantly contributed to its lower drawdowns and long-term risk-adjusted outperformance.

In March 2025, S&P DJI launched the S&P 500^® U.S. Revenue Market Leaders 50 Index. This index tracks companies within the S&P 500 that generate at least 50% of their revenue from domestic sources and are recognized as market leaders based on a “market leader score.”

This launch is particularly relevant as it emphasizes domestically focused companies, especially in the current climate of increased volatility. Year-to-date returns through April 4, 2025, show the index outperforming The 500™ by 9.33%.

In this blog, we will explore the methodology behind the S&P 500 U.S. Revenue Market Leaders 50 Index, its historical performance and its defensive, high-quality characteristics.

Methodology Overview

Revenue Screening

To be eligible for inclusion in the S&P 500 U.S. Revenue Market Leaders 50 Index, companies must be part of the S&P 500 and derive at least 50% of their revenue¹ from the U.S. As a result, only companies that primarily derive their revenue domestically are considered for inclusion.

Market Leaders Score

Next, the top 50 stocks from this subset are selected based on their market leaders score, which is calculated using the average z-score across three key metrics: i) sustained high return on invested capital (ROIC); ii) sustained high free cash flow margin; and iii) high market share. By focusing on companies with the highest market leader scores, the index tends to track high-quality firms that may be positioned to outperform and demonstrate defensive characteristics over the long term.

Weighting and Rebalance

Stocks are weighted using a free-float market capitalization (FMC) approach, with a single stock cap of 4.5%. The index rebalances semiannually in June and December. For a more comprehensive overview of the three market leader indicators, please refer to Exhibit 3.

Performance Review

Exhibit 4 presents the back-tested performance of the S&P 500 U.S. Revenue Market Leaders 50 Index compared to The 500 in both absolute and risk-adjusted returns. In addition to its recent success, the index has shown long-term outperformance. Since June 30, 2014, the S&P 500 U.S. Revenue Market Leaders 50 Index has surpassed the benchmark in absolute returns while maintaining lower volatility, resulting in a risk-adjusted return of 0.97. Moreover, the index has achieved a superior maximum drawdown and downside capture ratio versus The 500.

Exhibit 5 illustrates the historical downside protection offered by the S&P 500 U.S. Revenue Market Leaders 50 Index during past market selloffs. Over the four major drawdown periods shown, the S&P 500 U.S. Revenue Market Leaders 50 Index recorded an average maximum drawdown of just 8.7%, which is approximately two-thirds of the S&P 500’s average drawdown of 13.0%.

Exhibit 6 highlights the enhanced profitability metrics of the S&P 500 U.S. Revenue Market Leaders 50 Index compared to the S&P 500 U.S. Revenue Leaders Index (see our recent blog to learn more about the latter index). By selecting the top 50 securities based on market share score, the index demonstrated improved return on equity (ROE), return on invested capital (ROIC) and return on assets (ROA).

Conclusion

While the S&P 500 U.S. Revenue Market Leaders 50 Index has demonstrated strong recent performance, it has also outperformed the S&P 500 over the long term in both absolute and risk-adjusted terms, all while providing downside protection during periods of market stress. The S&P 500 U.S. Revenue Market Leaders Index reflects profitable, market-leading companies with a U.S. focus, which is especially relevant in the recent market environment.

1. As measured by FactSet GeoRev
2. For more information on the S&P 500 U.S. Revenue Market Leaders 50 Index, please see the index methodology.
3. For more information on Syntax’s Market Share Score, please see the methodology.

Reliable and comprehensive benchmarks are indispensable in a landscape where global diversification is at the forefront. The S&P World Index tracks the performance of large- and mid-cap stocks from 24 developed markets, providing a consistent universe for historical market analysis and implementation of investment strategies.

The S&P World Index was launched in 2009, building on the legacy of the S&P Global BMI (Broad Market Index). Currently, the S&P World Index encompasses over 1,500 companies, reflecting approximately 85% of the market capitalization of the developed markets included in the index.

The index is constructed following a rules-based approach for size and liquidity. Companies must have a float-adjusted market cap of at least USD 100 million to be included in the index as of the annual rebalance in September. To ensure replicability, only liquid stocks are considered; companies must meet a 12-month median value traded ratio of 20% and a six-month median daily value traded of USD 0.25 million The large- and mid-cap stocks represent the top 85% of the local market’s total available capitalization. For further details about the index’s construction, please refer to the methodology.

As a co-founder of the Index Industry Association, S&P DJI adheres to industry best practices and evolving regulatory standards, reinforcing its role as a reliable and accurate benchmark provider for global market participants. The index methodology is reviewed regularly by an independent oversight committee, ensuring it evolves alongside market dynamics while maintaining its foundational principles.

Home bias—the tendency to invest predominantly in domestic equities—can limit diversification potential. The S&P World Index encompasses international equities from 24 developed countries, illustrating its comprehensive coverage (see Exhibit 2).

Moreover, the S&P World Index offers diversified weight across sectors. Exhibit 3 summarizes the weights of the Global Industry Classification System (GICS^®) sectors for this benchmark.

In order to provide benchmarks across the developed market opportunity set from targeted perspectives, the S&P World Index Series offers over 380 subindices that include sector, style and currency versions, as well as specific regional views (e.g., the S&P World Ex-U.S. Index).

In addition, the series includes sustainability-focused indices, such as the S&P World Scored & Screened Index, leveraging S&P DJI’s world-class sustainability datasets.

The S&P World Index is relevant to the passive investing conversation, as historic data suggest it’s difficult to outperform. SPIVA^® (S&P Indices Versus Active) U.S. Year-End 2024 Scorecard results show that over the past 15 years, the S&P World Index has performed better than 92.5% of the actively managed funds that aim to beat it, which is even higher than the 89.5% outperformance rate of the S&P 500.

In conclusion, the S&P World Index provides comprehensive coverage of developed market equities and is a world-class benchmark backed by the highest standards of quality and integrity offered by S&P DJI. In an upcoming blog, we will showcase the S&P World Ex-U.S. Index and its outperformance of U.S. equities during the start of 2025.