INTRODUCING THE BNP PARIBAS
HIGH DIVIDEND PLUS INDEX
BNP Paribas developed the BNP Paribas High Dividend Plus Index (the “HD Plus Index” or the “Index”) with a simple goal: to combine an effective high dividend stock selection methodology with complementary risk reduction components. The stock selection methodology at the core of the index is used to identify companies that have both historically increased their dividends and that also have strong balance sheets and cash lows. In our view, these factors increase the likelihood of future dividend performance.
On top of this dividend-focused stock selection, the Index includes exposure to an S&P 500® Index call option selling strategy that is designed to generate additional yield, and includes exposure to a put option buying strategy aimed at preserving value during market downturns (the equity component, along with the call and put option components, are referred to collectively as the “Base Component" of the Index). The Index rebalances using a volatility control mechanism that maintains a component weighting between the Base Component and cash that is expected to generate an annual volatility of roughly 6%, which is less than half of the S&P 500® Index's historical volatility(1). The Index is excess return and is calculated in excess of 3M Libor.
(1) As measured as the S&P 500® Index's annualized volatility over the last 50 years
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INDEX CONSTRUCTION MECHANISM
The BNP Paribas High Dividend Yield US Equity Long TR USD Index, which is the underlying index of the HD Plus Index and is only one component of the BNP Paribas High Dividend Plus Index, utilizes a stock selection strategy that consists of a universe of liquid U.S. stocks, excluding financial companies(1). All stocks in the selection must have an average daily trading volume greater than $30 million.
Every month the index methodology selects 40 stocks intended to have the highest and most stable dividend yields, as scored by the methodology summarized below. The methodology was designed in accordance with three broad principles:
Dividend Visibility
Is the company capable of maintaining high dividends in the future?
Financial Leeway
Does the company have the apparent financial means to pay a high dividend?
High Dividend Yield
Does the company currently offer a high dividend yield?
(1) Financial companies (e.g. banks, insurance companies or other nancial services companies) are excluded due to the absence of an appropriate tool to evaluate the reliability of their future dividends.
The Base Component of the Index will rebalance, potentially daily, according to the historical volatility of the Index level. The Index has a target volatility of 6%.
During periods when the value of the Index is fluctuating greatly (measured as when historical volatility is greater than 6%), the Index will be more exposed to cash and less exposed to the Base Component. The opposite is true during periods when the Index level fluctuates less (measured as when historical volatility is less than 6%).
The call option component in the BNP Paribas High Dividend Plus Index is a systematic strategy that provides exposure to a call option selling strategy on the S&P 500® Index. By being exposed to a call options selling strategy, the strategy is designed to generate additional yield. The premium generated from exposure to an options selling strategy is intended to reduce losses that the Index would otherwise experience during market downturns.
A put option strategy is the third component of the HD Plus Index. To attempt to reduce the strategy's overall volatility and to reduce potential drawdowns, the Index methodology systematically incorporates put options on the S&P 500® Index. Put options increase in value when the price of their underlying asset decreases. Hence the Index aims to benefit from having exposure to an S&P 500® Index put option buying strategy aimed at preserving value during market downturns.
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