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S&P Dow Jones, a leading global provider of indices, has combined the two well-known investment themes of low volatility and income to create the S&P Europe 350 Low Volatility High Dividend Index.
The newly launched index, which is designed to serve either as a performance benchmark or as a underlying reference for index-linked products such as exchange-traded funds (ETFs), measures the performance of 50 high yielding, lower volatility companies within the S&P Europe 350.
To be included in the new index, a stock must be a member of the S&P Europe 350, an equity index drawn from 17 major European markets, covering approximately 70% of the region’s market capitalization. All stocks in the selected universe are ranked in descending order by their 90-day trailing dividend yield. The top 75 stocks with the highest dividend yield are then selected, provided that the number of stocks from each GICS sector and country is capped at 15.
Using available price return data for the trailing 252 trading days leading up to each index rebalancing reference date, the realized volatilities of the 75 selected highest yielding stocks are calculated. The 75 selected highest yielding stocks are then ranked in ascending order by realized volatility. The top 50 securities with the lowest realized volatility form index, which is equally weighted.
Commenting on the launch, Vinit Srivastava, Senior Director at S&P Dow Jones Indices, said: “The Low Volatility High Dividend framework used to create this index is unique to S&P Dow Jones Indices and has already been applied to the S&P 500. The innovative S&P Europe 350 Low Volatility High Dividend Index combines two investment themes, low volatility and high dividend, using price volatility to eliminate typical dividend traps. Historically, it has been found that high price volatility is a good indicator of companies in stress.”
The first index to use the low volatility high dividend framework, the S&P 500 Low Volatility High Dividend Index, was launched in October 2012. This index is the underlying reference to the PowerShares S&P 500 High Dividend Portfolio (SPHD), an NYSE Arca-listed ETF with some $138 million in assets.