Indexology^® Blog

Leveraged loans are playing an increasingly prominent role within the high yield landscape, with data from S&P Dow Jones Indices showing that the U.S. leveraged loan market has grown from nearly USD 400 million to USD 1.5 trillion over the last decade.¹ The expansion of the broader loan ecosystem has naturally increased the importance and relevance of indices measuring performance and serving as category benchmarks, creating the potential for index-linked products and derivatives based on the S&P UBS Leveraged Loan Index Series.

Offering a broad benchmark for the U.S. loan market, the S&P UBS Leveraged Loan Index tracks USD-denominated leveraged loans with a credit rating below investment grade or, for unrated loans, with a spread of 125 bps above their reference rate.² The index rebalances at the end of every month to account for new loans, continually reflecting changes in underlying credit risk and interest rate spreads. When it comes to credit risk, as shown in Exhibit 1, there has been a shift of over 10% from BB rated loans to B rated loans over the last decade.

The index also reflects how interest spreads (above the reference rate) have drifted downward over time as the leveraged loan market has grown. The index-weighted average spread of the S&P UBS Leveraged Loan Index declined (or compressed) over the period shown in Exhibit 1—both at the overall level and within each credit bucket—as shown in Exhibit 2.

External forces also play a role in shaping the S&P UBS Leveraged Loan Index. Exhibit 3 shows the evolution of the index-weighted average three-year discount margin over the current year.³ The impact of the April 2025 tariff announcements and the accompanying economic and market uncertainty had the effect of sharply increasing the discount margin in April, but this was followed by a reversal and more, bringing the discount margin to new YTD lows over the summer.

The S&P UBS Leveraged Loan Indices have been an important measure of the evolving U.S. and European loan markets since the 1990s, enhancing transparency for market observers and participants. The indices will continue to support the market through loan benchmarking, performance measurement and the development of index-linked products. With the growing demand for indexing solutions in the leveraged finance sector, the S&P UBS Leveraged Loan Indices are poised to play an increasingly significant role in shaping market understanding.

¹ See the S&P UBS Leveraged Loan Index Factsheet. Data as of Sept. 30, 2025.

² The yield on each loan is composed of a reference rate plus a predetermined spread. The reference rate for each loan is typically a published money market interest rate that evolves over the period of the loan. Presently, the U.S. dollar SOFR (Secured Overnight Funding Rate) is typically used for new loans, but other reference rates may be used—especially historically.

³ The three-year discount rate for each loan, based on its current price, is the excess annualized yield (over the reference rate) that would result if that loan realized all future cash flow over an assumed three-year life. Accordingly, if the loan is currently trading at a price equal to its notional, the discount margin will equal the spread exactly. A lower price will result in a higher discount margin; a higher price results in a lower discount margin.

Over the long term, both the S&P 500^® Quality Index and S&P 500 Momentum Index have outperformed the broader market (as measured by the S&P 500) in terms of absolute and risk-adjusted returns. The quality factor emphasizes financially strong and stable companies, while momentum tracks stocks with sustained price trends. When combined, these strategies create a complementary pairing that can enhance diversification across various market environments. In this blog, we will explore their methodologies, key characteristics and performance.

Methodology Overview

High quality is typically associated with a company’s strong profitability, high earnings quality and robust financial strength. To reflect these quality characteristics, the S&P Quality Indices¹ utilize three key metrics: return on equity (ROE) to assess profitability, balance sheet accruals ratio (BSA)² to evaluate earnings quality and financial leverage ratio (FLR) to measure debt-to-equity level (see Exhibit 2).

Momentum indices focus on securities that have recently demonstrated strong relative performance, positioning for their continued outperformance. The S&P Momentum Indices generally use 12-month risk-adjusted price momentum to select stocks ranked in the top quintile.³ To account for short-term reversal effects, the most recent month is skipped when calculating price momentum.⁴ The use of risk-adjusted momentum, instead of raw price momentum, may help to mitigate the negative effects of idiosyncratic risk associated with raw momentum and reduce downside risks.⁵

Quality and Momentum: Mutual Diversifiers

These factors can be complementary as they highlight distinct yet synergistic drivers of performance. Momentum focuses on market dynamics and investor sentiment, whereas quality is rooted in intrinsic financial strength. By combining these two factors, the resulting blend could strike a balance between performance potential and downside protection. Momentum tends to enhance performance in strong, trending markets, while quality offers stability during downturns.

These characteristics are evident in their performances across various economic regimes⁶ (see Exhibit 3). The S&P 500 Quality Index has historically outperformed in Falling Growth regimes, while the S&P 500 Momentum Index has historically performed better in Rising Growth regimes. With a historically low excess return correlation of -0.07,⁷ the S&P 500 Quality Index and the S&P 500 Momentum Index tend to act as effective diversifiers for each other.

Combining Quality and Momentum: Potential for More Persistent Performance

To illustrate the historical advantages of combining the S&P 500 Quality Index and the S&P 500 Momentum Index, we have created a hypothetical index of indices with equal weights of 50% assigned to each (referred to as the “50/50” index). This index is rebalanced semiannually at the end of June and December. As shown in Exhibit 4, the 50/50 has a few striking features.

More Persistent Historical Returns

The 50/50 index outperformed the broader S&P 500 on a more consistent basis, in both absolute and risk-adjusted terms across various short- and long-term horizons.

More Favorable Capture Ratios

Furthermore, the 50/50 index has exhibited more favorable capture ratios, achieving one-to-one returns during up markets⁸ while experiencing significantly smaller declines during down markets.

Outperformance across Historical Economic Regimes

Finally, the 50/50 index generated positive excess return across all economic regimes, while the S&P 500 Quality Index experienced negative excess returns in Rising Growth environments and the S&P 500 Momentum Index had negative excess return in the Falling Growth and Rising Inflation economic regime.

¹ Please refer to the S&P Quality Indices Methodology for more details.

² Richardson, Scott A., et al., “Accrual Reliability, Earnings Persistence and Stock Prices,” Journal of Accounting & Economics, Vol. 39, No. 3, September 2005.

³ Please refer to the S&P Momentum Indices Methodology for more details.

⁴ Jegadeesh, Narasimhan and Sheridan Titman, “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency,” The Journal of Finance, Vol. 48, No. 1, March 1993.

⁵ Fan, Minyou, et al., “Momentum and the Cross-section of Stock Volatility,” Journal of Economic Dynamics and Control, Volume 144, November 2022.

⁶ Hao, W. and Rupert Watts, “A Historical Perspective on Factor Index Performance across Macroeconomic Cycles”, S&P Dow Jones Indices, November 2024.

⁷ Correlation is calculated using monthly excess returns of the S&P 500 Quality Index and the S&P 500 Momentum Index versus the S&P 500, respectively, from Dec. 31, 1994, to Aug. 31, 2025.

⁸ The market is defined as the monthly performance of the underlying benchmarks from Dec. 31, 1994, to Aug. 31, 2025.

Whether it’s the beginning of the school year or the drop in temperatures, September is often seen as a month of change. This year, there’s an additional factor reinforcing this idea: on Sept. 17, 2025, the U.S. Federal Reserve reduced the Fed Funds rate to 4.00%-4.25%, representing the first change in monetary policy since late 2024. With this rate cut and the market pricing further cuts before the end of the year, high-dividend-yielding strategies like the S&P 500^® High Dividend Index may garner increased interest among market participants.

Alongside the supportive monetary policy, the S&P 500 High Dividend Index currently exhibits both a significant valuation and a dividend yield advantage compared to the S&P 500. This blog will explore these factors, delve into long-term performance—especially during historical drawdown events—and examine the current sector weights in relation to The 500™.

Performance Comparison

Exhibit 1 presents back-tested historical performance dating back to January 1991. Across the period studied, the S&P 500 High Dividend Index outperformed The 500 by 13 bps, with returns of 11.24% compared to 11.11%, albeit with higher volatility. Notably, despite this increased volatility, the S&P 500 High Dividend Index had capture ratios below 100.

Exhibit 2 shows the performance of the S&P 500 High Dividend Index during 10 historical drawdowns since 1998. Although it underperformed during the Global Financial Crisis and the onset of the COVID-19 pandemic, the S&P 500 High Dividend Index outperformed The 500 in the other eight significant drawdown events over the full period. Across the 10 drawdowns, the S&P 500 High Dividend Index recorded an average return of -12.1%, while The 500 averaged -19.8%, meaning the former had an average outperformance of 7.7%.

Dividend Yield Comparison

Exhibit 3 illustrates the current last 12 month (LTM) dividend yields for both the S&P 500 High Dividend Index and The 500. As of Sept. 30, 2025, the S&P 500 High Dividend Index offered a yield of 4.52%, while The 500 yielded 1.17%, showing a notable difference of 3.34%.

Valuation Comparison

Exhibit 4 illustrates the composite valuation discount by employing a straightforward average of the price-to-book, price-to-sales and price-to-earnings ratios of the S&P 500 High Dividend Index in comparison to The 500. As of Sept. 30, 2025, the S&P 500 High Dividend Index was trading at a 52% discount, reflecting discounts of 65%, 58% and 32% on a price-to-book (P/B), price-to-sales (P/S) and price-to-earnings (P/E) basis, respectively. The 52% composite discount placed it in the 97^th percentile of relative cheapness since 2007.

Sector Comparison

Exhibit 5 displays the current sector weights for The 500 and the S&P 500 High Dividend Index. The S&P 500 High Dividend Index demonstrates a notable underweight of 33.5% in the Information Technology sector. This underweight is counterbalanced by substantial overweights in the Real Estate, Consumer Staples and Utilities sectors, which have overweights of 20.4%, 11.6% and 10.7%, respectively.

Conclusion

The S&P 500 High Dividend Index may be of particular interest amid the easing monetary policy backdrop due to its historically favorable valuation and dividend yield relative to the S&P 500. The index’s relative valuations and high dividend yield are notable characteristics, particularly in the context of ongoing concerns about elevated valuations, low yields and concentration in broader benchmarks.

For many years, global issuers have gravitated toward the U.S. dollar bond market, drawn by its unparalleled liquidity, vast investor base and efficient access to funding. However, recent developments in the U.S. yield environment are beginning to shift perspectives on the U.S. Treasury market’s long-held reputation as the world financial safe haven. In response, market participants are increasingly turning to other regions, including the euro and sterling bond markets, which are gaining traction as alternatives for market participants seeking stability and value in today’s shifting landscape.

The euro-denominated government and corporate bond markets, anchored by the relative stability and scale of the eurozone, continue to offer robust liquidity and diversification opportunities. Similarly, the U.K.’s sterling bond market, supported by its long-standing reputation for transparency and regulatory strength, is drawing renewed interest amid global volatility. This is due to the relative value and resilience found within these European markets, with both GBP and EUR bonds providing options for those seeking to navigate the evolving global fixed income landscape. This shift in focus underscores the growing importance of European currencies in global portfolios, as market participants seek to balance risk and performance in an environment marked by fiscal uncertainty in the U.S.

During the period from April 1, 2025, to Aug. 28, 2025, U.S. Treasuries (as represented by the iBoxx $ Treasuries) saw a modest performance, posting a return of 1.13%. In comparison, the iBoxx Global Government EMEA Index, which represents sovereign bond issues by central governments in the EMEA, recorded a gain of 1.66% for the same timeframe (see Exhibit 1), in USD-hedged terms. Individual sovereign indices covering German, French, Italian and British sovereign bonds also registered positive performance in USD-hedged terms. The iBoxx Global Government Italy rose by 2.04%, while the iBoxx Global Government Germany increased by 0.35% when compared to U.S. Treasuries.

Performance dynamics shift when accounting for the EUR-USD and GBP-USD exchange rates, as reflected in USD unhedged indices. Over the period, the iBoxx Global Government EMEA index outperformed the iBoxx $ Treasuries by 7.82% (see Exhibit 2). Additionally, when examining individual sovereign markets in USD unhedged terms, several of them posted notably higher returns compared to U.S. Treasuries. German sovereign bonds increased 7.29%, while Italian sovereign bonds gained 9.20% over the same period.

Shifting Correlations and Improved Diversification

The correlation data highlights a notable divergence between six-month (April 2025-August 2025) and 10-year relationships among U.S. Treasuries and major European sovereign bond markets. Over the April 2025-August 2025 period, correlations with U.S. Treasuries were significantly lower than their respective 10-year averages. For example, Germany and France, which both show strong 10-year correlations of 89% with U.S. Treasuries, had much weaker short-term correlations of 37% and 36%, respectively. Italy and the U.K. also display this pattern, with 10-year correlations of 74% and 76% that dropped to 45% and 31% in the recent period, respectively. The broader EMEA index follows suit, with a 10-year correlation of 62% but only 44% for the six-month period. This suggests that while U.S. and European government bonds had historically moved closely together, recent market conditions have led to greater differentiation and reduced co-movement, reflecting shifting investor sentiment and regional economic factors.

If sustained, the recent decline in correlation between U.S. Treasuries and European sovereign bonds highlights the potential for new diversification opportunities. Strong unhedged returns in EUR and GBP markets, especially Italian and German bonds, suggest growing investor interest. If U.S. fiscal uncertainty persists, European bonds might be an interesting alternative for investors looking for global diversification.

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