The market turmoil last quarter helped the STOXX Select Indices, which track stocks with the lowest volatility and highest dividends, outperform by margins not seen in years.
Between Dec. 4 and Dec. 24, the STOXX® Global Select 100 USD Index beat the benchmark STOXX® Global 1800 Index by 7.6 percentage points, the largest outperformance for any 15-day streak since November 2008, when a deepening global financial crisis prompted investors to dump banking shares.1 As markets have rebounded in the new year, the Global Select index has underperformed by only 1 percentage point through Jan. 18.
For the entire fourth quarter, the STOXX Global Select 100 USD Index outpaced its benchmark by 6.6 percentage points, an advantage seen only in two quarters since 2005: between April and June of 2012, amid concern of a slowdown in the US economy, and between July and September of 2011 as the Eurozone’s sovereign debt crisis unfolded.
Investors turn to stability and income
That low-volatility stocks should outperform in times of market downturns is no surprise. In turn, high-dividend stocks also fared relatively better than other parts of the market during the fourth quarter as bond yields fell. Yields on 10-year Treasuries dropped to 2.6% at the start of January this year from 3.1% at the start of last October as investors pared back expectations of future interest rate hikes in the US. Lower bond yields typically make high dividends relatively more attractive to income investors.
Europe, US in same pattern
A similar trend took place in Europe over last quarter. Since Oct. 1, the STOXX® Europe Select 50 Index has beaten the benchmark STOXX® Europe 600 Index by nearly 5 percentage points.2 The Europe Select 50 Index is on track to beat the Europe 600 for a fourth straight month, the longest stretch since September 2015. The STOXX Europe Select 50 Index has risen 6.3% since Jan. 1, compared with the STOXX Europe 600’s 5.8% gain.3
In the US, the STOXX® USA Select 50 USD Index dropped 2% during the fourth quarter, compared with a 14.1% retreat for the STOXX® USA 900 Index. This performance was a contrast to the third quarter, during which the STOXX USA Select 50 USD Index gained 1.6% while its benchmark climbed 7.3%.
So far in 2019, the STOXX USA 900 Index has advanced 7% and the STOXX USA Select 50 USD Index has gained 6.3%.
Two-step selection process
The Select Indices first exclude from their initial universe those stocks with the highest volatility. In a second step, stocks that rank highest based on their 12-month historical dividend yield are selected. The percentage of exclusion/inclusion at each step is kept the same. Select Indices are typically reviewed quarterly, with the selected constituents weighted according to the inverse of their volatility, with a cap of 10%. To access a guide on the indices’ methodology, please click here.
The indices have been popular particularly among issuers of structured products, as a low volatility/high dividend tilt tends to decrease the price of derivatives used in the products. The STOXX Select Diversification Indices, additionally, include an extra filter that reduces the probability of piling into highly correlated stocks.
This month, Eurex announced that one future and one option contract on the STOXX Europe Select 50 Index will start trading on Feb. 14.
A positive start to the year
While the market tone has turned decisively more bullish in the new year, the Select Indices continue to perform well. In some instances, they are outperforming even as bond yields rebounded and readings of implied volatility, such as the VIX and the EURO STOXX 50® Volatility (VSTOXX®), have come down.
Whether last year’s environment of uncertainty and share losses was a turning point in the decade-old global rally, or rather a temporary setback, may determine the resilience of STOXX Select Indices to extend their lead into 2019.
- STOXX® Global Select 100 USD Index
- STOXX® Global 1800 Index
- STOXX® Europe Select 50 Index
- STOXX® Europe 600 Index
- STOXX® USA Select 50 USD Index
- STOXX® USA 900 Index
- EURO STOXX 50® Volatility (VSTOXX®)
1 Net returns on dollars.
2, 3 Net returns on euros through Jan. 18, 2019.