“Has Ibbotson found a better way to beat the market?”

Source: TheStreet, 2014

Roger G. Ibbotson, PhD.

  • Chairman and Chief Investment Officer, Zebra Capital Management
  • Professor Emeritus, Yale School of Management
  • Founder of Ibbotson Associates, now a Morningstar Company

The NYSE® Zebra Edge® Index

An opportunity to benefit from unpopular stocks

Since 1977, Roger Ibbotson has conducted groundbreaking research on asset allocation and investment strategies. His four-decade teaching career with the University of Chicago and Yale University includes numerous awards and placed him among a select group of academics who have helped change the way investors think. His daring prediction — large-cap stock returns over 11% annually would lead to the Dow breaking 10,000 — made him one of the most famous names in finance.1

Professor Ibbotson and his team at Zebra Capital Management now bring that wealth of experience to the design of the new NYSE® Zebra Edge® Index. This dynamic index capitalizes on the core insight of his career: stocks historically have provided higher returns than bonds.

The NYSE® Zebra Edge® Index is a rules-based, risk-controlled index which leverages Ibbotson’s behavioral research. Less popular and less volatile stocks provide the potential for consistent long-term returns.

Helpful Resources

Ibbotson’s cool stock selection process

The NYSE® Zebra Edge® Index evaluates the 500 largest publicly traded companies in the United States each quarter and removes the most popular and the most volatile.2 The diagram below shows how every three months the NYSE® Zebra Edge® Index selects on average 197 stocks with the potential for higher returns with less risk.

NYSE® then applies a risk control methodology that makes daily adjustments to the allocations between the selected Cool Stocks, U.S. Treasuries and an interest-free cash account. This daily re-allocation further reduces risk when markets are volatile, moving rapidly up or down.

Key Terms


  • Cool stocks – Stocks that have been less frequently traded over the last two years and have had lower volatility over the last three months and one year.
  • Hot stocks – Stocks that have been the most frequently traded over the last two years and have had higher volatility over the last three months and one year.
  • Popularity – The tendency for some stocks to be traded more frequently than others because of name recognition or other factors.
  • Volatility – The daily price changes in a stock, up or down, which historically has been an indication of risk.

The power of selecting the cool stocks

While cool stocks often include lesser known companies, Ibbotson and his team at Zebra Capital Management have found that, on average, they also had a tendency to provide higher long-term returns. Hot stocks often include well-known brand names and, in general, had a tendency to experience higher volatility. The table below lists some examples of cool and hot stocks.

Hot and cool stocks based on the quarterly selection in November 2016. This is not a complete list of the selected stocks, which may change each selection and is not a recommendation to buy or sell any individual stock.

THE POTENTIAL BENEFIT OF AVOIDING HOT STOCKS

Over time, the NYSE® Zebra Edge® Index’s approach of selecting the cool stocks would have provided a higher average annual return than the hot stocks that were eliminated.

NYSE® Zebra Edge® Index

5.43% Annual Return

HOT STOCKS

4.63% Annual Return

Performance period from 7/6/00 to 12/31/16. Compound annual returns for the NYSE® Zebra Edge® Index and a non-risk controlled hot stocks strategy that is equally weighted. The NYSE® Zebra Edge® Index was established on 10/11/16. Performance for the NYSE® Zebra Edge® Index is back-tested by applying the NYSE® Zebra Edge® Index strategy, which was designed with the benefit of hindsight, to historical financial data. A non-risk controlled hot stocks strategy could provide higher returns during certain periods of time. Back-tested performance is hypothetical and has been provided for informational purposes only. Past performance is not indicative of nor does it guarantee future performance.

Cool stocks may provide lower risk with higher returns

The NYSE® Zebra Edge® Index would have provided consistent returns over a variety of market environments through the cool stock selection process. The graph below shows how the NYSE® Zebra Edge® Index would have provided 106% higher compound annual returns than the S&P 500® Price Index with 24% of the volatility.3

Source: NYSE® and S&P Dow Jones®. From 7/6/00 to 12/31/16. The NYSE® Zebra Edge® Index was established on 10/11/2016. Performance for the NYSE® Zebra Edge® Index is back-tested by applying the NYSEZebra Edge™ Index strategy, which was designed with the benefit of hindsight, to historical financial data. Certain components of the NYSE® Zebra Edge® Index were unavailable before 7/6/00. Back-tested performance is hypothetical and has been provided for informational purposes only. The S&P 500® Price Index results are actual for the full period and are not risk controlled. Past performance is not indicative of nor does it guarantee future performance. The NYSE® Zebra Edge® Index could underperform relative to other equity investment strategies. The hypothetical data includes index transaction fees.

1 Source: The Equity Risk Premium, 2006.

2 The 500 largest publicly traded companies in the United States as represented by the NYSE® U.S. Large Cap Equal Weight Index. The stock selection process occurs in February, May, August and November.

3 Volatility based on standard deviation of the daily price changes in each index from 7/6/00 to 12/31/16.

This page was designed to provide information on the NYSE® Zebra Edge® Index and should be used in conjunction with the Nationwide New Heights® fixed indexed annuity materials. It does not describe the New Heights product or historical crediting rates of the product. For more information on New Heights, please ask your financial professional for a product brochure. Fixed indexed annuities are not an investment and do not directly invest in the stock market or any index.

This material is not a recommendation to buy, sell, hold, or roll over any asset, adopt a financial strategy or use a particular account type. It does not take into account the specific investment objectives, tax and financial condition or particular needs of any specific person. Clients should work with their financial professional to discuss their specific situation.

Nationwide New Heights, an individual, single purchase payment, deferred fixed indexed annuity is issued by Nationwide Life and Annuity Insurance Company, Columbus, Ohio. New Heights does not directly participate in the stock market or any index. It is not possible to invest in an index. Withdrawals are subject to income tax, and withdrawals before age 59½ may be subject to a 10% federal tax penalty.

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