FTSE Russell, Research Affiliates develop high income smart beta index series

Jun 5th, 2015 | By | Category: ETF and Index News

FTSE Russell, a global index provider, and Research Affiliates, a pioneer in smart beta strategies, have announced the launch of the FTSE RAFI Equity Income Index Series.

Jason Hsu, co-founder and vice chairman of Research Affilates.

Jason Hsu, co-founder and vice chairman of Research Affiliates.

The indices are designed to track the performance of high-yielding, high-quality stocks by screening companies on dividend payments and financial health. A fundamental-based weighting scheme is also used which offers an alternative constituent exposure versus traditional capitalisation-weighted indices.

Developed in response to investor demand for a more intelligently structured dividend-focused strategy, the indices offer a core equity solution for investors in search of yield but concerned with the ability of low-quality companies to maintain their dividend payouts.

Caroline O’Shaughnessy, Managing Director, Sales and Marketing, FTSE Russell, commented: “As our partnership with Research Affiliates reaches its tenth year, we are proud that our close collaboration continues to yield innovative benchmarks that respond to investor needs.”

Jason Hsu, Co-Founder and Vice Chairman, Research Affiliates, added: “For a good number of investors, accessing sustainable, high income remains an unmet need. Yields in fixed income remain historically low, while within the equity space, existing high dividend strategies tend to tilt toward low growth sectors or poor quality stocks. To address this gap in the market, Research Affiliates and FTSE Russell are introducing these new smart beta indexes, which we built in close collaboration with Source. The FTSE RAFI Equity Income Index Series includes high dividends from companies that have been screened for their ability to sustain their dividends.”

Whilst there are various quality income dividend indices on the market, the FTSE RAFI series differentiates itself through the use an alternative weighting scheme. Through this, constituents are weighted by fundamental size and dividend yield, rather than market capitalisation. In comparison to traditional capitalisation-based indices, which weight constituents based on the price investors are willing to pay, these indices focus instead on a company’s footprint in the economy. Through severing this link with price the indices set out to avoid systematically overweighting companies that are overvalued. This is in keeping with Research Affiliates’ findings which show that long-term returns can be improved by using constituent weightings based on fundamental characteristics.

Constituents for the indices are selected from the parent FTSE Global All Cap Index using a methodology which recalculates weights by fundamental size and screens for dividend yield and financial sustainability. Four measures of company size are taken from financial statements to establish the fundamental weighting: book value, cash flow, sales and dividends. Companies are then screened by dividend yield to include only those with an above median dividend yield. These results are then assessed for financial sustainability using measures of profitability, lack of distress and accounting quality, with the lowest ranked quintile of companies excluded from the index.

The index series is offered in global (All-World), regional (Emerging and Developed Europe) and country (US and UK) formats. They have been designed for investors seeking sustainable dividend yield and can be used by reference products, such as exchange traded funds, and for performance measurement.

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