UK Equity Income Indices
Investors have a choice of UK Equity Income index strategies, each with different risk-return characteristics, weightings methodologies and factor tilts.
These difference influence the performance of each index strategy (all figures below are on a total return basis for GBP investors).
Best performing for 2017
The best performing strategies for UK Equity Income in 2017 were:
- +12.3% total return of the MSCI UK Select Quality Yield index (tracked by BMO MSCI UK Income Leaders ETF (LON:ZILK))
- +8.7% total return of the FTSE 350 ex Investment Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF (LON:DOSH).
- +7.9% total return of the WisdomTree UK Equity Income Index (tracked by WisdomTree UK Equity Income UCITS ETF (LON:WUKD)
This compares to +12.3% for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)).
Best performing over last 3 years
The best performing strategies for UK Equity Income over the last 3 years were:
- +26.4% cumulative total return of the FTSE 350 ex Investment Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF (LON:DOSH).
- +20.8% cumulative total return of the WisdomTree UK Equity Income Total Return Index (tracked by WisdomTree UK Equity Income UCITS ETF (LON:WUKD).
- +18.1% cumulative total return of the FTSE UK Dividend+ Index (tracked by iShares UK Dividend UCITS ETF (LON:IUKD).
This compares to +31.5% cumulative return for FTSE 100 (best tracked by HSBC FTSE 100 UCITS ETF (LON:HUKX)).
Fig. 1: Total Returns (Cumulative) by strategy/index (cumulative, GBP terms)
Best risk-adjusted returns
The best risk-adjusted returns in 2017 of available UK Equity Income indices was achieved by:
- MSCI UK Select Quality Yield index (tracked by BMO MSCI UK Income Leaders ETF), with a 1Y Sharpe ratio of 1.40
- FTSE 350 ex Inv Trust Qual/Vol/Yield Factor 5% Capped Index (tracked by Lyxor FTSE UK Quality Low Vol Dividend (DR) UCITS ETF) with a 1Y Sharpe ratio of 1.07
- WisdomTree UK Equity Income Total Return Index (tracked by WisdomTree UK Equity Income UCITS ETF) with a 1Y Sharpe ratio of 0.97.
To look at consistency of risk-adjusted returns, we have plotted 1Y Sharpe ratios vs 3Y Sharpe ratios for each UK Equity Income index strategy in Fig.2 below.
Fig.2. 1Y & 3Y Sharpe Ratios, selected UK Equity Income index strategies (GBP terms)
Different index construction methodologies has a material impact on performance outcomes – both in absolute terms and on a risk-adjusted basis.
A naïve interpretation is to consider performance in isolation, however our view is that index selection is more nuanced than that: it should relate to the objectives and constraints of individual client portfolios and the desired exposure - on asset-basis, risk-basis and factor-basis and the interaction between the selected strategy and the rest of a client portfolio.
Note: Scope of our comparison
For these reports, we have analysed the indices and ETFs detailed in Fig.3.
Fig. 3: UK Equity Income Indices & ETFs vs HSBC FTSE 100 UCITS ETF (LON:HUKX)
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The data in this article is also being used in an analytical report for future publication that is being sponsored by BMO and Powershares. I wrote this article myself, and it expresses my own opinions.
Additional disclosure: This article has been written for a US and UK audience. Tickers are shown for corresponding and/or similar ETFs prefixed by the relevant exchange code, e.g. “NYSEARCA:” (NYSE Arca Exchange) for US readers; “LON:” (London Stock Exchange) for UK readers. For research purposes/market commentary only, does not constitute an investment recommendation or advice, and should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product. This blog reflects the views of the author and does not necessarily reflect the views of Elston Consulting, its clients or affiliates. For information and disclaimers, please see www.elstonconsulting.co.uk
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Chart data is as at 30-Dec-17