The table shows the performance of the S&P 500 and of three factor or “strategic beta” indices derived from it. All three of these indices can rightly be considered “defensive,” although they achieve their defensive character in different ways. The S&P 500 Dividend Aristocrats Index comprises stocks which have increased their dividends for at least 25 consecutive years, and can be thought of as both a yield and quality play. The S&P 500 Low Volatility Index holds the 100 least volatile stocks in the S&P 500 and tries to exploit the well-known low volatility anomaly. Dynamic VEQTOR is a multi-asset index which owns both the S&P 500 and a long position in VIX index futures.
What defensive indices have in common is that they aim to offer protection from declining markets and participation in rising markets. It’s not perfect protection (the Aristocrats and Low Vol both lost money in the first half of October), and it’s not full participation (all three indices lagged the S&P 500 in the last half of the month). But when the market is choppy, lowering volatility can enhance returns while also lowering risk.
This article was written by Craig Lazzara, global head of index investment strategy, S&P Dow Jones Indices.
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