This caused notable moves in US financial markets, and as we move through 2019, markets are likely to be particularly sensitive to any data or policy that doesn’t hit consensus, which means increased volatility.
A higher-yielding equity strategy combined with a ‘quality’ tilt can harness returns from higher-growth US companies as well as de-risk US equity portfolios. Combining yield and quality can provide greater diversification benefits than ‘pure dividend’ strategies given the low historical correlations of the quality factor with other factors such as size, value, yield and momentum.
The MSCI USA Select Quality Yield index exhibits strong tilts towards quality(1), yield, and low volatility factors compared to its parent universe, the MSCI USA index. This bias to defensive characteristics has historically displayed lower risk versus the broader US equity market.
The chart below shows the distribution of the credit ratings of the constituents of the MSCI USA Select Quality Yield (SQY) index against a ‘pure dividend’ strategy as captured by the S&P 500 Dividend Aristocrats index, and the wider MSCI USA index. Nearly 75% of the MSCI USA SQY constituents have upper investment-grade ratings, while the S&P 500 Dividend Aristocrats had 59% in line with the MSCI USA index.