“Behavioral finance could be the key to higher returns with less risk.”
Roger G. Ibbotson, PhD.
- Co-Founder and Chairman, Zebra Capital Management, LLC
- Professor Emeritus, Yale School of Management
- Founder of Ibbotson Associates, now a Morningstar Company
The NYSE® Zebra Edge® II IndexZebra 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 some people make irrational investment decisions. Renowned economist Professor Roger Ibbotson and the team at Zebra applied behavioral finance to the equity markets and discovered that:
- Irrational decisions by investors may add volatility and risk
- The most popular stocks historically have provided lower returns
Zebra’s research methodology is combined with a daily risk control methodology to create the NYSE® Zebra Edge® II Index, a rules-based index which, by design, endeavors to provide higher returns with less risk.
Helpful Resources
Ibbotson’s behavioral finance filtering process
The NYSE® Zebra Edge® II Index evaluates the 500 largest publicly traded companies in the United States each quarter and removes the riskiest and most volatile companies, leaving fewer irrational equities.² The diagram below shows how every three months the NYSE® Zebra Edge® II Index selects rational equities with the potential for higher returns with less risk.
The NYSE® Zebra Edge® II Index applies a risk control methodology that makes daily adjustments to the allocations between having a leveraged exposure to Zebra Equities, a short exposure to the S&P 500, U.S. Treasuries and an interest-free cash account.⁴ This daily reallocation is designed to further reduce risk when markets are volatile, moving rapidly up or down.
The benefit of a rational long-term strategy
Over the last 23 years, U.S. Treasury Bills have failed to keep pace with inflation, and Large Cap U.S. Stocks have experienced significant drawdowns, reducing returns. Although long-term bonds have been consistent, the back-tested performance shown below demonstrates how the NYSE® Zebra Edge® II Index would have provided a higher compound annual return.
Source: S&P Dow Jones, Board of Governors of the Federal Reserve System (US), ICE Data Indices and 2022 SBBI Yearbook, Roger G. Ibbotson, Duff & Phelps. Growth of $1 4/1/00 to 12/31/23. 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 (if applicable). Long-term Gov’t Bonds and U.S. Treasury Bills are guaranteed by the U.S. government.
The NYSE® Zebra Edge® II Index was established on 10/6/2020. Performance for the NYSE® Zebra Edge® II Index is back-tested by applying the NYSE® Zebra Edge® II Index strategy, which was designed with the benefit of hindsight, to historical financial data. Certain components of the NYSE® Zebra Edge® II Index were unavailable before 3/14/00. 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® II Index could underperform relative to other equity investment strategies. The hypothetical data includes index transaction fees, including a 0.50% per annum index fee.
Validated and tracked by the NYSE®
Since 1792, the New York Stock Exchange (NYSE) has been the symbol of the strength of the American financial system. The world’s largest stock exchange tracks more than $16 trillion in assets. The engineers and strategists at the NYSE validate the methodology and track the daily performance of the NYSE® Zebra Edge® Index.
¹ The 500 largest publicly traded companies in the United States as represented by the NYSE® U.S. Large Cap Equal Weight Index. The methodology for that index can be found at
www.theice.com/market-data/indices/equity-indices/methodologies.
² Irrational equities refer to those equities with both a) the highest volatility over the previous three months and prior year and b) the highest daily turnover rate over the past two years. These are removed in the index qualification process.
³ Approximately 200 Zebra Equities are selected through this quarterly selection process. The selection process occurs in February, May, August and November.
⁴ The S&P 500® is tracked through e-mini S&P 500 futures and U.S. Treasuries are tracked through U.S. Treasury futures.
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® Select, an individual, single purchase payment, deferred fixed indexed annuity is issued by Nationwide Life and Annuity Insurance Company, Columbus, Ohio. New Heights Select does not directly participate in the stock market or any index. It is not possible to invest in an index. Withdrawals are subject to income tax, and withdrawals before age 59½ may be subject to a 10% federal tax penalty.
Annuities have limitations. They are long-term vehicles designed for retirement purposes. They are not intended to replace emergency funds, to be used as income for day-to-day expenses or to fund short-term savings goals. Please read the contract for complete details.
Guarantees and protections are subject to the claims-paying ability of Nationwide Life and Annuity Insurance Company.
The mark NYSE® is a registered trademark of NYSE Group, Inc., Intercontinental Exchange, Inc. or their affiliates and is being utilized by ICE Data Indices, LLC under license and agreement. The marks Zebra® and Zebra Edge® are registered trademarks of Zebra Capital Management, LLC, may not be used without prior authorization from Zebra Capital Management, LLC, and are being utilized by ICE Data Indices, LLC under license and agreement.
ICE Data Indices, LLC owns all intellectual and other property rights to the NYSE® Zebra Edge® II Index (the “Index”), including the composition and the calculation of the Index, excluding the methodology and formula for the Index. Zebra Capital Management, LLC owns all intellectual and other property rights to the methodology and formula for the Index, which are being used by ICE Data Indices, LLC under license from Zebra Capital Management, LLC (together with its subsidiaries and affiliates, “Zebra”).
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The Index (including the methodology(ies) and formula(s) therefor has been designed and is compiled, calculated, maintained and sponsored without regard to any financial products that reference the Index (including the Products), any licensee, sub-licensor or sub licensee of the Index, any client or any other person. Zebra, IDI 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 Products. Zebra, IDI 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 Products.
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The NYSE® Zebra Edge® II Index is an excess return index. Indexes calculated on an excess return basis include calculation elements that reduce index performance. Because of this, an excess return version of an index will have lower performance than a total return version of the same index would, especially in high interest rate environments. Some excess return indexes also deduct a notional charge(s) in calculating index performance. This deduction(s) will reduce the potential positive change in index performance and increase the potential negative change in the index performance.
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