Asia Index, a joint-venture between S&P Dow Jones Indices, a leading global index provider, and BSE, India’s first stock exchange, has launched four smart beta indices tracking the factor performances of Indian equities.
Alka Banerjee, CEO of Asia Index.
The indices are designed to include non-market factors including value, momentum, quality and low volatility using a transparent and rules-based methodology while ensuring reasonable liquidity. As such, the indices are ideal as the basis for index-linked products such as exchange-traded funds.
The S&P BSE Factor Indices are made up of the S&P BSE Enhanced Value Index, the S&P BSE Low Volatility Index, the S&P BSE Momentum Index and the S&P BSE Quality Index. All of these indices are drawn from the constituents of the S&P BSE LargeMidCap Index, which is representative of the majority of the large- and mid-cap companies of India’s stock market.
Alka Banerjee, CEO of Asia Index, commented: “With the launch of the S&P BSE Factor Indices, we aim to broaden the S&P BSE Index family to cater to the demand of the investor base who continuously seek dynamic strategies that offer their own risk premia.”
The factors selected for the index range, namely value, low volatility, momentum and quality, have each been academically shown to provide superior risk-adjusted returns over long-term time horizons when compared to market capitalisation-weighted benchmarks. In addition to their statistical significance, the outperformance of each factor can also be explained through economic theory, implying that their performance is not merely the result of data mining or luck.
Each of the four indices includes the top 30 companies which are selected based on their respective factor scores in accordance with the index methodology. The S&P BSE Enhanced Value Index is designed to measure the performance of companies with valuations based on ratios – book value-to-price, earnings-to-price and sales-to-price. The S&P BSE Low Volatility Index comprises companies with the least amount of volatility. The S&P BSE Momentum Index is designed to measure the performance of companies that exhibit persistence in their relative performance. The S&P BSE Quality Index tracks high quality stocks calculated based on return-on-equity, accruals ratio and financial leverage ratio.
The maximum weight of stocks in all four factor indices is capped at 5%. The maximum weight of BSE sectors for the S&P BSE Enhanced Value Index and the S&P BSE Quality Index is capped at 30%.