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When rates rise, many investors seek to extend the logic of bonds to equities. If the appropriate response is to reduce (or eliminate) duration risk in one’s bond portfolio[1], why not seek to reduce duration risk in one’s equity portfolio? Reducing duration risk in an equity portfolio means owning cheaper and higher yielding stocks, where more of the return is concentrated in shorter periods of time. This approach is misguided.

The Equity Duration Fallacy-01.jpg
Source: Bloomberg, as of 6/30/22. P/E is the price-earnings ratio, also known as P/E ratio, or P/E, which is the ratio of a company’s share (stock) price to the company’s earnings per share. Chart is for illustrative purposes only and not indicative of any particular investment.

A stock with a P/E of 10 – roughly half of the P/E of the current P/E levels of the S&P 500 – still has a duration considerably longer than the bond market. Salvation from rising rates for equities comes not from low price and high dividend yields – but from growth. Stocks that consistently grow their dividends can be particularly effective solutions.

The S&P 500 Dividend Aristocrats consists of companies that have increased their dividends for at least 25 consecutive years. Here is the dividend growth delivered by the strategy over the past 15 years.

Source: Standard & Poor’s. As of 12/31/21.

These companies are delivering an income stream whose growth is outstripping the impact of rising rates and the inflation that often accompanies those rising rates. And because growing dividends can only be generated from growing earnings and cash flow, they are a key marker of high quality.

The approach extends beyond just the large cap portion of a core equity portfolio. The S&P MidCap Dividend Aristocrats – consisting of mid cap companies that have delivered at least 15 years of consecutive dividend growth – have delivered attractive levels of dividend growth that exceed the levels of the broad mid-cap market. And for those thinking about the ever-growing technology component of the core – there’s the S&P Technology Aristocrats with a minimum of 7 consecutive years of dividend growth.

Source: Standard & Poor’s. As of 12/31/21.

An important proof-point for the efficacy of dividend growth compared to low price/high yield alternatives is the outperformance of the S&P 500 Dividend Aristocrats compared to the Dow Jones US Select Dividend Index – an index of high-yielding US stocks.

Reinforcing the core, however, is not just about positioning for a specific environment. A core equity allocation should perform across the widest range of conditions. After all, there is a chance that interest rates don’t rise. The outperformance of consistent dividend growers in both rising and falling interest rate environments makes the S&P 500 Dividend Aristocrats potentially suitable for an evergreen, high-quality core equity strategy. And one that is particularly well fortified against rising rates.


Source: Bloomberg, 5/2/05 – 3/31/22. Results show average performance of both dividend growth – as represented by the S&P 500 Dividend Aristocrats Index – and high dividend yield – as represented by the Dow Jones U.S. Select Dividend Index – during different interest rate regimes. Monthly returns for each strategy were separated into rising rate periods and falling rate periods based on movements in the 10-year Treasury yield. Rising rate periods were defined as periods in which the change in the 10-year Treasury yield was > 0, and falling rate periods were those in which the change in the 10-year Treasury yield was 0. Average monthly returns were then annualized. Index returns are for illustrative purposes only and 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.

[1] A bond’s duration is the measure of price sensitivity to interest rate changes.

Important Information

This is not intended 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 index at reconstitution.

Investing is currently subject to additional risks and uncertainties related to COVID-19, including general economic, market and business conditions; changes in laws or regulations or other actions made by governmental authorities or regulatory bodies; and world economic and political developments.

Any forward-looking statements herein are based on expectations of ProShare Advisors LLC at this time. ProShare Advisors LLC undertakes no duty to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 

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. Obtain them from your financial advisor or broker-dealer representative or visit ProShares.com. ProShares are not suitable for all investors.

Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

Investments in smaller companies typically exhibit higher volatility. Small- and mid-cap companies may have limited product lines or resources, may be dependent upon a particular market niche and may have greater fluctuations in price than the stocks of larger companies. Small- and mid-cap companies may lack the financial and personnel resources to handle economic or industry-wide setbacks and, as a result, such setbacks could have a greater effect on small- and mid-cap security prices.

Technology companies may be subject to intense competition, product obsolescence, general economic conditions and government regulation and may have limited product lines, markets, financial resources or personnel. International investments may involve risks from: geographic concentration, differences in valuation and valuation times, unfavorable fluctuations in currency, differences in generally accepted accounting principles, and from economic or political instability.

The “S&P 500® Dividend Aristocrats® Index”, “S&P MidCap 400® Dividend Aristocrats® Index” and The “S&P® Technology Dividend Aristocrats® Index” are products of S&P Dow Jones Indices LLC and its affiliates and have 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 and S&P MidCap 400 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.

ProShares are distributed by SEI Investments Distribution Co., which is not affiliated with the funds’ advisor or sponsor.

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