FinEx, a London-headquartered ETF issuer with significant operations in Russia, has rolled out a smart beta equity ETF on Moscow Exchange.

The fund provides exposure to developed and emerging markets globally based on a Black-Litterman asset allocation model.

The FinEx Global Equity UCITS ETF is available to trade in US dollars (FXRW RM) and Russian rubles (FXWC RM) and comes with an expense ratio of just 0.10%. Income is accumulated within the portfolio.

Methodology

The fund is linked to the Solactive Global Equity Large Cap Select Index which consists of large-cap stocks from various developed and emerging market countries.

The index consists of eight sub-indices. Six of these are single-country indices from Solactive’s Global Benchmark Series that target stocks listed in the US, the UK, Germany, Japan, Australia, and China (excluding A-shares). Each index is composed of the firms that make up approximately the top 70% of the market capitalization within each country.

The other two sub-indices are the Solactive US Large Cap Technology Index, which consists of US large-caps designated as belonging to the technology sector, and the RTS Index, a widely followed gauge of the Russian stock market comprising 50 of the largest and most liquid stocks listed on Moscow Exchange.

Each of the sub-indices weights its constituents by float-adjusted market capitalization.

On a quarterly basis, the index allocates across the eight sub-indices based on the Black-Litterman model – a portfolio allocation model used by institutional investors.

In the context of the index, the Black-Litterman model starts with the market value of the sub-indices as the initial asset allocation and uses a reverse-optimization approach based on a “representative investor” to obtain the market-implied expected returns for each equity market.

The expected returns for each sub-index is calculated separately using proprietary Bayesian analysis based on the Shiller CAPE (cyclically-adjusted price-to-earnings) for each market.

The methodology then adjusts the initial allocation so as to increase the weight of sub-indices where the proprietary expected return is greater than the market-implied expected return. The tilt factor is applied to the allocation resulting from the previous quarter’s rebalance, allowing for a maximum movement of 2.5% up or down and constraining the final weight of each sub-index within 1% and 20%.

As of 24 January 2020, the index’s largest country exposures were the US (40.3%), Japan (15.3%), the UK (14.3%), and China (13.5%).