We explore the key characteristics of our Equity Income index.
A systematic focus on dividends helps enhance returns
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A systematic focus on dividends helps enhance returns. In this article, we explore the key characteristics of our Equity Income index
By Henry Cobbe, Head of Research, Elston Consulting The Elston Smart Beta UK Dividend Index is approaching its 10 year anniversary of inception date in December 2025. We are delighted to see the underlying methodology deliver against its core thesis – rooted in academia – that a focus on dividends defines intrinsic value and underpins total returns. What are the academic foundations of dividend investing?
For equities, dividend income and capital growth are the core components of Total Return. Dividends can also be used to estimate the intrinsic value of a company. The Dividend Discount Model (DDM), and its variants, the multi-period DDM and Gordon Growth Model (GGM) represent a fundamental approach to estimating the intrinsic value of a company, based on the net present value of its future dividend payments (grown into perpetuity for the GGM) and a terminal value. So dividends – in classical investing – are a core measure of a company’s worth.
Put differently the “yield” of a tree is its fruit. If you have a good (apple) tree, you can enjoy an annual supply of quality apples! How does the index compare to other indices?
The long-term performance of this systematic dividend-contribution weighted strategy is consistently outperforming traditional market-cap weighted indices for the UK equity market.
Since inception in December 2015, the Elston Smart-Beta UK Dividend Index has returned +107.15%, compared to +100.71% for the FTSE 100 and +92.62% for the FTSE All Share (based on data from FE). 
How does the fund compare to the peer group of active managers
The VT Munro Smart-Beta UK fund, which tracks the Elston Smart-Beta UK Dividend Index has returned +56.45% over the 5 years to end February. This compares to +42.48% for the IA UK Equity Income sector which representing a peer group of actively managed UK equity income funds. In the battle between man and machine, in this instance, the systematic nature of the index methodology has done a better job of selecting securities to deliver returns than the average active manager.
How has this systematic income-focused strategy done so well. To understand, it’s worth exploring the principles behind alternative-weighted indices.
What is an alternative-weighted index?
Traditional indices give a company a weight in the index based on its size (the market capitalization). This approach is known as traditional index, or cap-weighted index, or just “beta.” It’s also known as “passive.”
Alternative indices give a company a weight in the index based on some other metric (other than market cap). This approach is known as alternative index, or alt-weighted index, or that marmite term “smart-beta,” or worse “semi-active.” We prefer the phrase “systematic alt-weighted index strategy.” There’s no such thing as passive in our view. Index selection and index methodology design all require active choices that can lead to very different performance outcomes. The better description is whether strategies are systematic (rules-based) or subjective (manager judgement-based). How does the Elston Smart Beta UK Dividend Index methodology work?
The Elston Smart Beta UK Dividend is a systematic alternative-weighting strategy. What it does is take the universe of UK companies (excluding investment trusts), look at their forward-looking dividend estimates, and weight them in the index by their contribution to the overall dividend pie.
Whilst dividend-contribution weighted is a popular equity income index methodology, it is often applied to backward-looking dividends. The key difference of our approach is to use forward-looking dividend forecasts, based on analyst consensus. The index refreshes every month to capture any changes in that consensus view. Hence in 2022, as analysts upgraded their earnings (and hence dividend) estimates for energy companies, the index allocated progressively higher weights to those energy companies to capture that uptick in expected dividends. This helped it deliver very strong results as an inflation-hedging strategy. What are the other ways of creating a UK Equity Income Index
Aside from dividend-contribution weighting, there are several different ways to approach Equity Income index design. Some methodologies screen for a progressive dividend history, others rank by dividend yield. Different approaches result in different weighting schemes, different characteristics and different performance outcomes.
How do the holdings compare?
Because of this differentiated (yet rules-based, systematic approach), the make up of the index (and hence its performance is very different).
For example, the top 5 holdings of a UK all-share index would include AstraZeneca plc, Shell plc, HSBC Holdings plc, Unilever plc and RELX plc. By contrast, the top 5 holdings of the Elston Smart-Beta UK Dividend Index are HSBC Holdings plc, Shell plc, British American Tobacco plc, Rio Tino plc and BP plc. While universe of holdings for inclusion is the same, the weighting scheme applied is different. What characteristics does an Equity Income index have?
By being focused on Equity Income, the index has three interesting characteristics
How defensive was UK Equity Income in 2022
In the inflation shock of 2022, the performance of US Equities, World Equities, UK Equities and UK Equity Income index tracking funds was highly differentiated.
US Equities form the lion’s share of World Equities so are highly correlated. In 2022, US equity index funds were down -8.64% compared to world equity index funds -8.0%. By contrast, performance of the HSBC FTSE All Share Index fund was +0.71%, whilst the performance of the dividend-focused VT Munro Smart-Beta UK fund (which tracks the Elston Smart-Beta UK Dividend Index) was +8.22%. In this respect, the contribution of dividends to total return helped create a buffer. 
How defensive is UK Equity Income in 2024
With Trump unleashing a tariff war on “Tariff Tuesday,” US and hence World Equities have been under pressure. By contrast, UK equities, particularly UK equity income has proven resilient once again.
Year-to-Date (as at 14th March 2025), VT Munro Smart-Beta UK fund is up +4.96%, compared to +3.95% for the HSBC FTSE All Share index fund. This contrasts with -8.18% and -5.14% for funds tracking the US and World equity indices respectively. 
A monthly income
Part of the appeal of a dividend strategy is a regular income. One convenience of the Munro fund format is that instead of collecting different dividends at different times, the Munro fund collects all dividends from it 209 underlying holdings, and the Income share class pays out a monthly income of its current 4.50% dividend yield.
Trading costs and stamp duty
The monthly refresh of the dividend-weighting does unfortunately create trading costs. And whilst some fund providers exclude stamp duty from OCFs, the more conservative providers include it. Hence up to 0.50% of the OCF of the VT Munro Smart-Beta UK fund is stamp duty from monthly index rebalancing! Additional due diligence is required to ensure that OCFs are comparable on a like for like basis. Whilst we would welcome the abolishment of stamp duty to support the London Stock Exchange, we think it’s unlikely.
Value For Money
Just as the investment approach is somewhere between traditional index and active management, the OCF of the VT Munro Smart-Beta UK fund is between that of a traditional index fund and an actively managed UK equity income fund. Whether stamp duty is included or excluded in the OCF may differ on a fund by fund basis.
The OCF of the actively managed UK Equity Income peer group is currently 0.82% relative to an average fund size of £1bn. The OCF of the VT Munro Smart-Beta UK fund is currently 0.75% (including stamp duty) relative to fund size of £50m. As the fund size increases the OCF should decline. Given the performance of the VT Munro Smart-Beta UK strategy has far exceeded the performance of most active UK equity income funds, and the index has outperformed traditional index strategies, the dividend-focused strategy offers good value for money, in our view. A niche index
Whether looking at long-term performance of the index, or more recent performance of the index-tracking fund, we are delighted to see the thesis play out: that a systematic allocation to forward looking dividend payers (isolating the income factor) can generate superior returns relative to a traditional index. Whilst the same may not be true in all markets, it is certainly true in the UK.
A specialist fund
The VT Munro Smart Beta UK fund is a specialist index fund benchmarked to this index. Whilst scale and hence cost issues challenged its early years, more recently its costs have been capped, and the investment management taken in-house by Valu-Trac Investment Management to ensure a robust succession plan was in place following the retirement of its founder manager, Rob Davies.
A word from its creator
We were delighted to work extensively with Rob Davies who developed this concept in 2007 and calculated the weights until we codified it into an index methodology in 2017 and took on responsibility for administering the index.
“I have always been a passionate value investor, and believe in the power of dividends to reflect intrinsic value and compound returns. It’s wonderful to see this idea brought to life as an index, deliver on its objectives and substantiate the theory that underpinned its design.” (Rob Davies, Elston UK Equity Income Index Specialist, Elston Consulting) Comments are closed.
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