Source: TheStreet, 2014
Roger G. Ibbotson, PhD.
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.
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.
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.
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.
5.43% Annual Return
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.
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.
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