Unprecedented dividends cuts in 2020 due to the coronavirus pandemic have triggered the demand for a new type of underlying indices that allows issuers to offset dividend risk, while addressing the challenge of providing yield in a low interest rate environment. This formed the backdrop for the growing popularity of decrement and other overlay strategies applied to equities indices, ranging from single stock and market cap to alternatively weighted, sector and ESG indices.
A decrement index is a type of equity index, where a constant markdown, or ‘decrement’, is applied to the index. This decrement reflects the reinvestment of dividends implied by the dividend yield of the underlying equity index. The decrement can be calculated in different ways, either as a fixed number of dividend points or a fixed percentage and applied to any equity exposure.
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