Skip to main content

You are here

Blog Listing Page

Looking under the hood of the Russell 2000 Dividend Growth Index

By: Tom Goodwin, Senior Research Director

When shopping for a car, the value-minded consumer seeks quality and long-term durability at a reasonable price. This mindset can also be applied to indexing. For many market participants, evaluating stocks by price alone is not enough—they want quality characteristics, too. This can be especially pertinent when evaluating a small cap universe, like the constituents of the Russell 2000 Index, in this current period of heightened uncertainty. By filtering this universe for certain characteristics of quality, our value-minded consumer might evaluate stocks using the same traits they seek in their new car.

The Russell 2000 Dividend Growth Index (“Dividend Growth Index”) is screened to include only those stocks from the Russell 2000 that have increased their dividend payment over each of the last ten years. By distributing an increasing amount of income to shareholders, these companies have demonstrated management confidence and a commitment to creating shareholder value. A look under the hood of the Dividend Growth Index will show whether the filters applied satisfy the needs of our consumer.

In the table and chart below, we can see that the Dividend Growth Index has demonstrated a higher return and lower volatility than its reference index over the last 16 years. One driver of this could be the higher dividend yield inherent in the Dividend Growth Index — 2.46% compared to 1.55% for the Russell 2000.[1] But this only gives us part of the answer.


As we will see it is not just the higher dividend payments that are behind this higher performance. In a previous post, we highlighted how sector weighting and especially security selection drove much of the higher performance of the dividend growth indexes compared to the relevant reference indexes. Here we will evaluate this performance through the lens of a factor analysis.

We start with the well-known factor model of Fama and French.[2] Starting with the three standard factors of market beta, small cap and value exposures, we then add quality exposure as the fourth factor due to recent research.[3]

The following table shows the results of running a regression of the return of the Dividend Growth Index over a cash return on the four factors. We will briefly describe each in turn.

Market beta measures how sensitive the Dividend Growth Index is to market volatility. A coefficient of one or greater would mean that the index is very sensitive to market volatility. Here, we see that the market beta is well below one, indicating that the index has reduced sensitivity to market volatility.

Small cap is the return to a long-short index universe of stocks that is long in small cap stocks and short in large cap stocks. The coefficient measures the index’s exposure to small cap and it is no surprise that it is statistically significant for the Dividend Growth Index, which is based on a small-cap universe.

Value is the return to a long-short index universe that is long in high book-to-price stocks and short in low book-to-price stocks. The coefficient measures the index’s exposure to these less expensive stocks. Interestingly, the estimated exposure is even larger than the estimated small cap exposure.

Quality is return to a long-short index universe that is long in stocks with quality attributes like strong profitability growth, high return on equity and low volatility, among other things. The index universe is short those stocks with the opposite characteristics. We can see that the estimated exposure of the index to high quality is large and statistically significant.


If we take a look at a return attribution for each of the four factors, we can see how they impact the total return of the Dividend Growth Index. It should be no surprise that the largest contributor was the Market Beta to the broad market. What might be unexpected is that the return contribution of the Quality factor was almost as large as the contribution of the Small Cap factor. The Value factor also made a positive, but smaller, contribution.


The factor analysis shows that, by selecting companies that have successfully increased their dividend payments over many years, the Russell 2000 Dividend Growth Index occupies a corner of the small-cap space that is high in the quality and value factors. Those two factors combined with the Small Cap factor makes for three strong drivers of performance.

So a close look under the hood shows that the filters used to construct the Russell 2000 Dividend Growth Index can give our value-minded consumer the analysis they want—quality and value—just like their new car.

To read more on how indexes can be used to evaluate different segments of the market, see the FTSE Russell Blog post on dividend growth stocks.



[1]  Data as of October 31, 2016.

[2] Fama, E. and K. French, “The Cross-Section of Expected Stock Returns,” Journal of Finance, 1992; Fama, E. and K. French, “Common Risk Factors in the Returns on Stocks and Bonds,” Journal of Financial Economics, 1993.

[3] Asness, C., Frazzini, A., and Pedersen, L. (2014), “Quality minus Junk,” Working paper AQR CapitalManagement, LLC.


© 2016 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a license from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.

Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.

Blog Listing Page