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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.

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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.

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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).

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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.

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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.

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