“Behavioral finance could be the key to higher returns with less risk.”
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 for consistent returns using behavioral finance
Behavioral finance is a field of economics that applies insights from cognitive psychology to reveal how and why people make investment decisions. Renowned economist Professor Roger Ibbotson and the team at Zebra applied behavioral finance to the equity markets and discovered that:
- Sometimes investors make biased decisions that add volatility and risk
- This behavioral bias can result in overvalued and overtraded equities
- The most popular equities historically have provided lower returns
Zebra’s research methodology is combined with a daily risk control methodology to create the NYSE® Zebra Edge® Index, a rules-based index designed to potentially provide higher returns with less risk by avoiding overpriced, popular stocks and selecting undervalued equities with less volatility.
The NYSE Zebra Edge Index is one of the options available in the Nationwide New Heights® Indexed Universal Life Accumulator 2020 (New Heights® IUL), a life insurance product from Nationwide. This brochure was designed to provide information about the index. It does not describe the features or historical crediting rates of the product. The crediting rate applied in the life insurance product is subject to additional factors such as participation and floor rates. For more information on the New Heights® IUL, please ask your financial professional for a product brochure.
Ibbotson’s behavioral finance filtering process
The NYSE® Zebra Edge® Index evaluates the 500 largest publicly traded companies in the United States each quarter and removes the riskiest and most volatile companies.2 The diagram below shows how every three months the NYSE® Zebra Edge® Index selects rational equities with the potential for higher returns with less risk.
NYSE® applies a risk control methodology that makes daily adjustments to the allocations among the Zebra Equities, 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.
The benefit of a rational long-term strategy
Over the last 18 years, U.S. Treasury Bills have failed to keep pace with inflation, and Large Cap U.S. Stocks have experienced significant drawdowns, reducing returns. Long-term bonds have been consistent, but today’s interest rates are near historic lows. The NYSE® Zebra Edge® Index rational equity strategy would have provided more stable returns.
Source: S&P Dow Jones, Board of Governors of the Federal Reserve System (US), NYSE® and 2019 SBBI Yearbook, Roger G. Ibbotson, Duff & Phelps. Growth of $1 7/6/00 to 12/31/19. Large Cap Stocks (as represented by the S&P 500® Price Index), Long-term Gov’t Bonds (as represented by 10-year Treasuries), U.S. Treasury Bills and Inflation results are actual for the full period and are not risk controlled. Long-term Gov’t Bonds and U.S. Treasury Bills are guaranteed by the U.S. government. The NYSE® Zebra Edge® Index was established on 10/11/2016. 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. 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. 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.
Not a deposit – Not FDIC or NCUSIF insured – Not guaranteed by the institution – Not insured by any federal government agency – May lose value
1 The 500 largest publicly traded companies in the United States as represented by the NYSE® U.S. Large Cap Equal Weight Index.
2 The equities with the highest volatility over the previous three months and prior year are removed, and equities with the highest trading frequency are removed.
3 Approximately 200 Zebra Equities are selected through this quarterly selection process. The selection process occurs in February, May, August and November.
Risk control seeks to provide smoother returns and mitigate sharp market fluctuations. While this type of strategy can lessen the impact of market downturns, it can also lessen the impact of market upturns, potentially limiting upside potential. For additional information regarding the NYSE® Zebra Edge® investment strategy and related risks, please visit www.nyse.com/zedgeny
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 IUL Accumulator 2020, an indexed universal life insurance policy, is issued by Nationwide Life and Annuity Insurance Company, Columbus, Ohio. Indexed universal life insurance policies are not stock market investments, do not directly participate in any stock or equity investments, and do not receive dividends or participate in capital gains. Past index performance is no indication of future crediting rates.
All guarantees and benefits of the insurance policy are backed by the claims-paying ability of the issuing carrier. The marks NYSE®, NYSE Arca® are registered trademarks of NYSE Group, Inc., Intercontinental Exchange, Inc. (“ICE”) or their affiliates. The marks Zebra® and Zebra Edge® are trademarks of Zebra Capital Management, LLC, may not be used without prior authorization from Zebra Capital Management, LLC, and are being utilized by NYSE under license and agreement.
ICE owns all intellectual and other property rights to the NYSE® Zebra Edge® Index (the “Index”), including the composition and the calculation of the Index, excluding the concept, methodology, formulas and algorithms for the Index. Zebra Capital Management, LLC owns all intellectual and other property rights to the concept, methodology, formulas and algorithms for the Index, which are being used by NYSE Group, Inc. under license from Zebra Capital Management, LLC (together with its subsidiaries and affiliates, “Zebra”).
The Index has been licensed by NYSE Group, Inc. (together with its subsidiaries and affiliates, “NYSE”) to UBS AG and sub-licensed by UBS AG (together with its subsidiaries and affiliates, “UBS”) to Nationwide Life and Annuity Insurance Company (“Nationwide”). Neither Nationwide nor a Nationwide New Heights® IUL Accumulator 2020 (the “Product”) is sponsored, operated, endorsed, recommended, sold or promoted by Zebra, NYSE or UBS. Neither Zebra, NYSE nor UBS makes any representation or gives any warranty, express or implied, regarding the advisability or possible benefits of purchasing the Product or any other financial product. Clients should undertake their own due diligence and seek appropriate professional advice before purchasing any financial product, including the Product.
The Index and other information disseminated by NYSE are for informational purposes only, are provided on an “as is” basis, and are not intended for trading purposes. Neither Zebra nor NYSE makes any warranty, express or implied, as to, without limitation, (i) the correctness, accuracy, reliability or other characteristics of the Index, (ii) the results to be obtained by any person or entity from the use of the Index for any purpose, or (iii) relating to the use of the Index and other information covered by the Product, including, but not limited to, express or implied warranties of merchantability, fitness for a particular purpose or use, title or non-infringement. NYSE does not warrant that the Index will be uninterrupted and is under no obligation to continue compiling, calculating, maintaining or sponsoring the Index.
The Index (including the concept, methodology, formulas and algorithms therefor) has been designed and is compiled, calculated, maintained and sponsored without regard to any financial products that reference the Index (including the Product), any licensee, sub-licensor or sub-licensee of the Index, any client or any other person. Zebra, NYSE and UBS may independently issue and/or sponsor other indices and products that are similar to and/or may compete with the Index and the Product. Zebra, NYSE and UBS may also transact in assets referenced in the Index (or in financial instruments such as derivatives that reference those assets), including those which could have a positive or negative effect on the value of the Index and the Product.
None of Zebra, NYSE or UBS shall bear any responsibility or liability, whether for negligence or otherwise, with respect to (i) any inaccuracies, omissions, mistakes or errors in the concept, methodology, formulas or algorithms for, or computation of, the Index (and shall not be obligated to advise any person of and/or to correct any such inaccuracies, omissions, mistakes or errors), (ii) the use of and/or reference to the Index by Zebra, NYSE, UBS or any other person in connection with any financial product or otherwise, or (iii) any economic or other loss which may be directly or indirectly sustained by any client or other person dealing with any such financial product or otherwise. Any client or other person dealing with such financial products does so, therefore, in full knowledge of this disclaimer and can place no reliance whatsoever on Zebra, NYSE or UBS nor bring claims, actions or legal proceedings in any manner whatsoever against any of them.
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