Trading Index Dividends

Dividends are an important part of the total return stream of S&P 500, contributing one-third of long term total returns. S&P 500 linked index derivatives have meaningful exposure to dividend risk. Globally, index dividends are widely traded in over-the-counter markets and over the past year have begun trading on exchange environments. A sector analysis of S&P 500 dividend points suggests that while Financials and Consumer Staples are typically the largest contributors, dividends from individual sectors may contribute differently in dissimilar environments. The S&P 500 Dividend Index isolates dividend points of the S&P 500 on a quarterly basis, providing a benchmark for dividend risk management and trading contracts. Applications include: • Hedging: The index can be used as the underlying basis to hedge dividend risk embedded in index derivatives. • Arbitrage: Implied dividend points deviate and may often underestimate, realized dividends. This provides an opportunity to execute index-linked dividend arbitrage strategies. • Calendar spreads: Market implied dividends are driven by dividend growth expectations and perceptions of risk to dividends. As a result, implied levels incorporate a 'divided risk premium', which is compounded with increasing maturity. This provides opportunities to execute calendar spreads between longer-dated and shorter-dated dividends using index-linked tools. • Dividend stripping: A portfolio manager may synthetically sell index dividends to buy more cash equities. This strategy can be executed when the expected capital appreciation is greater than the dividend income