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By George Valantasis
Launched on July 8, 2014, the S&P 500® Quality Index established a framework for identifying high quality companies within the S&P 500. Today, it celebrates a decade of existence as one of the most prominent indices within our factor family. Over the past decade, quality has emerged as a mainstream factor, with significant growth in assets that track the factor. In this blog, we will review the performance of the S&P 500 Quality Index, analyze changes in sector weight and explore the quality characteristics since its inception.
10-Year Performance Review
For the 10-year period ending July 31, 2024, the S&P 500 generated a historically strong 13.14% annualized return (see Exhibit 1). Perhaps even more remarkable, however, is the S&P 500 Quality Index’s 13.28% annualized return, considering its defensive attributes that generally result in lower volatility.
Exhibit 2 displays the annual returns of the S&P 500 and S&P 500 Quality Index since its launch in July 2014. Notably, there have been minimal differences in annual returns over the past decade. However, a significant deviation occurred in the first seven months of this year, with the S&P 500 Quality Index outperforming the S&P 500 by approximately 3.69%.
Sector Weight
Exhibits 3 and 4 display the sector weights of the S&P 500 Quality Index since its inception. Exhibit 3 shows that the sector weights have been consistent. Information Technology had the highest average sector weight at 31.6%, as well as the largest overweight compared to the S&P 500, with a difference of 7.3%. Financials held the largest underweight relative to the S&P 500 at 5.6%, although it still had an average weight of 7.7% over the 10-year period.
Quality Metric Comparison: Then versus Now
Exhibits 5 and 6 showcase the improved return on equity (ROE) and net income margin of the median constituent of the S&P 500 Quality Index over the last 10 years. The S&P 500 Quality Index’s median constituent increased its ROE from 24.8% to 33.5%, representing a 35% improvement. In comparison, the S&P 500’s median constituent saw a more modest increase in ROE, from 14.5% to 16.6%, representing a 14% improvement. A similar trend is observed in the improvement of net income margin, with the median constituent in the S&P 500 Quality Index improving by 33%, versus 19% for the S&P 500.
Conclusion
Overall, the S&P 500 Quality Index may have exceeded expectations during the predominantly bullish market conditions of the past decade. The index delivered on expectations of providing defensive characteristics in the form of lower volatility and downside capture. Moreover, it achieved this outperformance without substantial sector differences compared to the S&P 500. Not to mention, the strategy’s quality profile improved over this period as well.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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