Indexology^® Blog

Research and development (R&D) investment is often a key indicator of innovation, competitiveness and a forward-looking mindset—qualities that may drive future revenue streams and market leadership. Comparing R&D Intensity¹ across companies can help identify those that are dedicating significant resources to developing new products, technologies or services capable of disrupting industries and generating lasting value. The recently launched S&P 500 Quality FCF R&D Leaders Index tracks high R&D Intensity companies that also demonstrate robust cash flows. In this blog, we will explore the index’s design, historical performance and fundamental characteristics.

Methodology Overview²

The S&P 500 Quality FCF R&D Leaders Index employs a sequential process that begins with the selection of companies exhibiting above-median free cash flow (FCF) margin and FCF return on invested capital (ROIC).³ This initial step helps ensure that only higher-quality companies, better positioned to sustain their investments in R&D, are considered. From this subset, the top 50 companies with the highest R&D Intensity are selected for inclusion in the index. Constituents are then weighted proportional to their R&D Intensity Score.

Back-Tested Outperformance

Across the full back-tested period, the S&P 500 Quality FCF R&D Leaders Index demonstrated significant outperformance compared to its benchmark universe (see Exhibit 2), albeit with higher volatility. In the shorter term, the index outperformed across the 1-, 3- and 5-year back-tested horizons.

Higher Growth and Profitability

Selecting companies based on FCF quality and R&D intensity helps identify companies that are both financially sound and positioned for future growth. These characteristics are reflected in historical fundamentals, as the S&P 500 Quality FCF R&D Leaders Index exhibited greater earnings and sales growth, higher profit margins and lower levels of leverage compared to its underlying universe (see Exhibit 3).

Innovation and Disruptive Technology – The Key Themes

Selecting companies based on R&D Intensity tilts the sector composition toward innovation-driven sectors and industries. At the sector level, the index has a 63.19% weight in Information Technology and a 30.82% weight in Health Care (see Exhibit 4). At the industry level, the top five industries within the index are Semiconductors, Application Software, Pharmaceuticals, Biotechnology and Systems Software (see Exhibit 5). Each of these industries plays a vital role in shaping the future of the Information Technology and Health Care sectors, driving growth and contributing to significant advancements across the market.

Conclusion

By selecting companies with high FCF and high R&D Intensity, the S&P 500 Quality FCF R&D Leaders Index has historically identified innovative, high-growth companies that are financially sound. These companies are not only focusing on future growth but also generating consistent cash to sustain innovation efforts without relying on excessive debt.

¹ R&D Intensity is defined as R&D expenditures by a firm divided by its revenue.

² For further details, please refer to the S&P Quality FCF R&D Leaders Index Methodology.

³ Bebb, Elizabeth et al. “The S&P Quality FCF Aristocrats^® Indices – Exploring the Principles of Consistency and Efficiency in Free Cash Flow Metrics.” S&P Dow Jones Indices. April 24, 2025.

How can the latest SPIVA Scorecard help inform investors in South Africa? S&P DJI’s Tim Edwards dives into the latest SPIVA results and the trends driving South Africa’s evolving active vs. passive landscape with Asset TV’s Mosidi Modise. 

Big Tech and the strength of the Magnificent 7 stocks have powered the S&P 500^® to 36 all-time closing highs through the end of October. Amid the euphoria, nervousness about the AI boom¹ has sent jitters through the market, most recently with SoftBank’s sale of its stake in Nvidia.

The extreme level of mega-cap dominance is reflected through the S&P 500 Equal Weight Index, whose trailing 12-month underperformance versus the S&P 500 plunged to 13% as of Oct. 31, 2025, with even worse levels seen in 1999 prior to the bursting of the tech bubble. With bubble fears in the air, it might be helpful to travel back to the past to understand the challenges of stock selection, especially throughout turbulent market regimes, with the knowledge that only a handful of stocks have outperformed over the long term.

Imagine it is Dec. 31, 1999. You are a professional portfolio manager and have witnessed five consecutive years of double-digit gains for the S&P 500, with a cumulative return of 253%. You are a bit apprehensive about whether these gains can continue and decide to seek five stock recommendations from your favorite Wall Street forecasters, denoted as Stocks 1-5,² which you carefully consider.

Luckily for you, a genie appears to grant you one wish. You decide to ask which of the five stocks will be the best performer in the future. Unfortunately, our genie lacks expertise in one important respect: she knows a good bit about volatility but less about the returns of individual stocks.

The genie first reveals the future volatility of each stock, measured simply by the annualized standard deviation of daily returns. Exhibit 1 shows that all five stocks will be more volatile than the S&P 500, with standard deviations ranging from 59% (Stock 1) to 26% (Stock 5).

You’re a bit nervous about the high volatility of the first stock, but Stock 5, while still more volatile than The 500™, looks relatively more benign. The genie next tells you about the frequency of large losses in Exhibit 2, which shows the probability of the stocks declining by at least 1% or at least 5% on a single day. Stock 1 is the most likely of the group to have large daily losses, which has increased your anxiety.

It is now Nov. 13, 2025, and it’s time to evaluate how well each of the forecasters did and how well you would have done to have taken their advice. Exhibit 3 tells us the actual identity of the five stocks and their total return since Dec. 31, 1999. Stock 1, Nvidia, was the best performer in our study,³ with a stunning cumulative performance of more than 200,000%, followed by Apple, Amazon and Microsoft. Stock 5, Exxon, although the least volatile, underperformed The 500.⁴

On a risk dimension, the best performer was the most volatile holding. Volatility tests an investor’s conviction, and sometimes the stocks you will have most wanted to own are the hardest to hold. This psychological difficulty is exacerbated for professional asset managers, who, acting as fiduciaries for their clients, may face challenges convincing them to stay confident when the market moves against their favor.

Going back to Dec. 31, 1999, you would not have known that tough times were soon in order, with the S&P 500 about to post declines for the next three consecutive years, followed later by the Global Financial Crisis of 2008. Much later would be the COVID-19-related downturn in 2020, the losses in 2022 and most recently the tariff-related tumult in early April 2025. Over long horizons, most stocks underperformed the market,⁵ and we know that most active managers underperformed with them, perhaps because historically, holding onto volatile stocks through painful periods of underperformance has required courage when one’s natural instinct is to sell.

¹ https://www.nytimes.com/2025/11/07/business/stock-market-safety.html?unlocked_article_code=1.zU8.G-0a.Y8jQOKYocJwG

² The stocks recommended can, but do not have to be a member of the S&P 500 at the time of this exercise.

³ The prescience of the forecaster who recommended Stock 1 is admirable, but we know that stock market forecasting is notoriously difficult, as any reader of our SPIVA^® Scorecards will recognize.

⁴ Nvidia and Amazon joined the S&P 500 in November 2001 and November 2005, respectively.

⁵ Bessembinder, Hendrik.  “Which U.S. Stocks Generated the Highest Long-Term Returns,” Nov. 11, 2024.

Global fixed income markets have been buffeted by tariff-related tensions and inflation concerns coupled with monetary policy uncertainty, with many central banks cutting rates, Japan in tightening mode and the U.S. Fed ending its quantitative tightening program. Focusing on the U.S. and Europe, sovereign yield curves in both regions have steepened since late 2024, with the spread between the 10- and 2-year Treasury yield rising to 53 bps as of Nov. 10, 2025. Corporate credit spreads have also remained near historic lows, narrowing by 23 bps in the U.S. since the start of the year while remaining marginally above zero in Europe, as shown in Exhibit 1. These evolving dynamics can create a mixture of challenges and opportunities for active managers seeking to outperform their benchmarks.

Reflecting on the first half of the year, how did bond pickers fare? According to our SPIVA^® (S&P Indices Versus Active) Mid-Year 2025 Scorecards, 69%¹ of bond funds globally underperformed their respective benchmarks on a fund-weighted basis, higher than the 54% observed for equities. Looking across the U.S. and Europe, Exhibit 2 highlights that 90% of U.S. General Investment Grade Funds and 88% of U.S. High Yield Funds lagged their respective benchmarks, while European managers saw lower, but still significant, rates of underperformance in these categories. However, there were a few pockets of opportunity. Notably, nearly two-thirds of U.S.-domiciled Emerging Market Debt Funds outperformed their benchmark, benefiting from the tailwind of a weaker U.S. dollar that may have eased repayment conditions for issuers of U.S. dollar-denominated debt.

To better understand these results, it’s important to consider the traditional drivers of excess return for bond managers. Exhibit 3 illustrates the impact of term, credit and illiquidity premia on bond markets this year. In the U.S., the normalization of the yield curve favored managers who increased duration risk, while moderate tilts to riskier credit may have contributed positively. In Europe, however, markets may have been more difficult to navigate, with mixed results from increased credit risk and allocation to longer-dated bonds often not paying off. Greater tilts toward illiquid bonds would not have helped in the U.S. and appeared to offer minimal benefits in Europe.

Similar trends emerged in other major markets, including Australia, China and the U.K., where shifting monetary and fiscal conditions may have affected managers’ opportunities to generate excess returns. Only 5 of the 13 headline categories shown in Exhibit 4 posted majority outperformance in H1, evidence that outperformance remains elusive across fixed income markets globally. Over a 15-year horizon, none of these reported categories managed to beat their benchmarks.

As we approach the end of the year, uncertainty over the U.S. Fed’s upcoming December rate decision, labor market weakness and economic growth concerns continue to weigh on market participants. We will have to wait for our year-end 2025 SPIVA results to find out if bond managers were up to the challenge. In the meantime, for a closer look at how active fixed income managers performed in the first half of the year, explore our SPIVA Library.

¹   Calculated as the ratio of the number of funds underperforming YTD to the total number of funds at the beginning of the YTD period across all SPIVA regions.

For more than 20 years, S&P DJI’s SPIVA^® (S&P Indices Versus Active) Scorecards have been evaluating active funds’ performance against their appropriate benchmarks on a biannual basis. The results of our regional SPIVA Scorecards continue to show that active outperformance is rare, especially over the long term.¹

Spanning across 11 regions, 54% of all equity funds underperformed across categories.² Not coincidentally, this result is consistent with the relatively benign 54% underperformance rate for our largest and most closely watched category of U.S. Large Cap Equity funds, which is on track for its lowest annual underperformance rate since 2022.

Outside of the U.S., there were additional bright spots, with Exhibit 1 showing that most Emerging Markets Equity funds outperformed, while International Equity and Global Equity funds had a slightly more difficult time beating their respective benchmarks.

Turning our attention to domestic equity managers across regions, 11 of our 17 reported domestic fund categories in Exhibit 2 posted majority underperformance in H1 2025. Results varied across regions; for example, only 17% of managers domiciled in Brazil underperformed the S&P Brazil LargeCap. Meanwhile, results were worse for South African managers, with 92% underperforming against the S&P South Africa 50. The 1-, 3- and 5-year underperformance rates for these funds and more are shown in Exhibit 2.

Offering perspective on the prospects for stock pickers globally, Exhibit 3 shows the percentage of constituents that beat the benchmark across categories. On average, 49% of stocks outperformed their respective benchmarks across regions. The 44% rate for the S&P 500^® notably displayed a significant improvement compared to 2023 and 2024, both challenging years driven by mega-cap dominance. The majority outperformance of Brazil domestic funds is perhaps consistent with the fact that 76% of stocks outperformed their benchmark.

Looking more broadly, in addition to better-than-average prospects for stock selection, regional allocation decisions may have mattered particularly for global equity managers, with the S&P World Ex-U.S. Index outperforming the S&P World by 9% in H1 2025. As observed in Exhibit 4, global fund managers may have benefited from an underweight to the U.S., which makes up 72% of the S&P World’s weight. Despite this tailwind, 58% of global managers still failed to outperform across regions, as demonstrated in Exhibit 1.

H1 2025 was a tale of two markets, while H2 has seen sustained outperformance of large caps, with the S&P 500 Equal Weight Index underperforming the S&P 500 by 6% as of Nov. 6, 2025. This may signal headwinds for active managers who underweight the largest stocks. Meanwhile, the turnaround in U.S. markets, with the S&P World outpacing S&P World Ex-U.S. Index by 2% over the same time period, may portend challenges for international and global equity funds. In the meantime, to find out more about the results of our SPIVA Mid-Year 2025 Scorecards across regions and asset classes, visit our SPIVA Library.

¹ Ganti, Anu and Lazzara, Craig, “Shooting the Messenger,” S&P Dow Jones Indices, November 2022.

² Calculated as the ratio of the number of funds underperforming YTD to the total number of funds at the beginning of the YTD period across all SPIVA regions.