Risk and return of short-duration equity investments *

• We analyze traded claims on index dividends, i.e., dividend derivatives.
• We find that long exposure to dividends outperforms the underlying indices.
• International diversification benefits are high for dividend strategies.
• The returns are related to an options-based downside risk factor.
• Ex-ante risk premia obtained from a Lintner model, a survey model, as well as carry predict realized returns.

We analyze short-duration equity investments using traded claims on index dividends. We show that investment strategies with constant short maturity outperform a systematic long position in the underlying equity index on a risk-adjusted basis and in absolute terms. Furthermore, we find higher international diversification benefits for this strategy, compared to traditional equity indices. We relate the observed outperformance to market downside exposure, in particular an options-based downside risk factor. We use three alternative models to extract ex-ante risk premia implied in the prices of dividend derivatives and find evidence for substantial time variation in expected returns.