[This ETF Industry Perspective is sponsored by ProShares.]
What's a valuable way to assess the effectiveness of an investment strategy? By looking not only at how it performs when the market is up, but how it reacts to inevitable downturns. After all, markets are uncertain, and bull markets never run forever—so looking closely at how an investment does when markets shift can be a useful test.
With that in mind, we took a look at the S&P 500® Dividend Aristocrats® Index during the five worst downturns since its inception in 2005, and then looked at its subsequent performance when the market recovered. Why? Because the Dividend Aristocrats are an elite set of companies. To qualify for inclusion in this index, companies within the S&P 500 must demonstrate their ability not just to pay dividends, but grow these dividends consistently, every year, for at least 25 consecutive years. And while the minimum is 25 years, more than half of the Dividend Aristocrats have grown their dividends for more than 40 consecutive years, with 10 names having done so for more than half a century.
Putting Quality To The Test
Companies that have been able to raise their dividends for that many years are likely to be of quality—many are household names and, as a group, generally have had stable earnings and solid fundamentals, as well as a demonstrated ability to weather market turbulence in the past.
To test how the Dividend Aristocrats performed when the market declined, we went back through the data and found the five worst market downturns that have hit the S&P 500 since May 2005. These include the historic drop in the fourth quarter of 2008, as well as subsequent drops in the first quarter of 2009, second quarter of 2010, first quarter of 2011 and the most recent drop in the fourth quarter of 2018.
S&P 500 Dividend Aristocrats Index vs. S&P 500
Worst Drawdowns and Subsequent Rebounds (May 2005 - December 2018)
Source: Morningstar. Index returns are for illustrative purposes only and do not represent actual fund performance. Index performance returns do not reflect any management fees, transaction costs or expenses. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results. See below for fund performance.
Dividend Aristocrats Typically Outperformed In Drawdowns—And Rebounds
Here's what the data revealed about this group of companies. The first column shows the S&P 500's worst drops, starting with the fourth quarter of 2008. The second column displays how much the Dividend Aristocrats over or underperformed.
As you can see, in four of these market downturns, the S&P 500 Dividend Aristocrats outperformed the S&P 500 in the drop. Sure, this means that the Dividend Aristocrats still experienced a downturn, but not as much as the S&P 500. And when we looked at what happened one year later, then three years later, and finally five years later, we found that—almost across the board, in 11 of 12 subsequent periods—the Dividend Aristocrats outperformed and recovered better than the wider market.
The Takeaway: The Dividend Aristocrats Showed Resiliency When Markets Declined
The Dividend Aristocrats have demonstrated a history of outperforming during periods of market stress, along with subsequent periods of recovery.
If you want to take advantage of the potential resilience of the S&P 500 Dividend Aristocrats, consider the ProShares S&P 500® Dividend Aristocrats ETF (NOBL), which tracks the index. NOBL is part of a suite of Dividend Growers ETFs across a range of market caps and asset classes.
Kieran Kirwan, CAIA, is ProShares’ director of investment strategy.
NOBL’s total operating expenses are 0.35%. Performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Shares are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. ET (when NAV is normally determined for most funds) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Current performance may be lower or higher than the performance quoted. For standardized returns and performance data current to the most recent month end, see Performance.
This information is not meant to be investment advice. There is no guarantee dividends will be paid. Companies may reduce or eliminate dividends at any time, and those that do will be dropped from the indexes at reconstitution.
Investing involves risk, including the possible loss of principal. This ProShares ETF is diversified and entails certain risks, including imperfect benchmark correlation and market price variance, that may decrease performance. Please see summary and full prospectuses for a more complete description of risks. There is no guarantee any ProShares ETF will achieve its investment objective.
Carefully consider the investment objectives, risks, charges and expenses of ProShares before investing. This and other information can be found in their summary and full prospectuses. Read them carefully before investing.
The "S&P 500® Dividend Aristocrats®" Index is a product of S&P Dow Jones Indices LLC and its affiliates and has been licensed for use by ProShares. "S&P®" is a registered trademark of Standard & Poor's Financial Services LLC ("S&P") and "Dow Jones®" is a registered trademark of Dow Jones Trademark Holdings LLC ("Dow Jones") and have been licensed for use by S&P Dow Jones Indices LLC and its affiliates. ProShares have not been passed on by S&P Dow Jones Indices LLC and its affiliates as to their legality or suitability. ProShares based on the S&P 500 Dividend Aristocrats Index are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and they make no representation regarding the advisability of investing in ProShares. THESE ENTITIES AND THEIR AFFILIATES MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO PROSHARES.
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