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Three years ago, S&P DJI launched the S&P Quality, Value, and Momentum Top 90% Multi-factor Indices (the S&P QVM Top 90% Indices) across the large-, mid- and small-cap U.S. equities segments. These indices have enriched our factor lineup, offering a differentiated approach that selects a high percentage of the universe, while excluding only the lowest-ranked decile.

In this blog, we will recap the methodology, review the indices’ performance and dive into their core characteristics.

Methodology Overview

The S&P QVM Top 90% Indices track the stocks in the top 90% of their respective underlying universes, ranked by their multi-factor score, which is based on the average of quality, value and momentum factors. Constituents are float-adjusted market capitalization weighted. This approach aims to ensure that the indices maintain similar stock counts and constituent weights as their benchmarks, which has historically resulted in low tracking error.

To illustrate the rationale behind removing the bottom 10% of stocks by multi-factor score, we can compare the performance of each decile in the S&P 500. In our analysis, we ranked stocks within the large-cap universe by their multi-factor score and rebalanced quarterly, with D1 representing the highest-ranked stocks and D10 the lowest. Exhibit 1 shows that the bottom 10% stocks significantly underperformed the other deciles within the large-cap universe.

Three-Year Live Performance of the S&P QVM Top 90% Indices

The index construction has historically limited significant outperformance or underperformance relative to the benchmark. Exhibit 2 demonstrates that since their launch, the S&P QVM Top 90% Indices have moderately outperformed their benchmarks in both the large- and small-cap universes. In the mid-cap universe, the S&P QVM Top 90% Index has generally performed in line with its benchmark. Year-to-date, all three of the S&P QVM Top 90% Indices have outperformed their benchmarks.

The methodology of the S&P QVM Top 90% Indices has helped maintain a low tracking error, reduce volatility and lower maximum drawdowns since their launch. The similar capture ratios further demonstrate that the methodology has reduced large deviations compared to the benchmark during up and down markets.

Back-Tested Performance of the S&P QVM Top 90% Indices

As shown in Exhibit 3, all three S&P QVM Top 90% Indices have outperformed their benchmarks over the long term, both in absolute and risk-adjusted terms, while maintaining a low tracking error. Additionally, over the long-term period, they have provided lower volatility and lower maximum drawdown.

Conclusion

Overall, the S&P QVM Top 90% Indices have consistently demonstrated the ability to outperform over the long and short term, all while maintaining low tracking errors and benchmark-like features such as similar stock counts and constituent weights.

These indices have shown their potential to provide moderate outperformance, reduced risk of underperformance and low tracking errors, all while preserving similar characteristics to their benchmarks.

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