FTSE Russell expands smart beta range with momentum and yield factor indices

Aug 12th, 2015 | By | Category: ETF and Index News

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FTSE Russell, a leading global index provider, has expanded the FTSE Global Factor Index Series to include coverage of two additional factors: Momentum and Dividend Yield.

FTSE Russell expand smart beta range with momentum and yield indices

FTSE Global Factor indices have been expanded to include momentum and yield.

The new equity indices are a natural extension of the FTSE series, which is available in developed market and emerging market versions, and track theoretically sound and academically supported factors.

Designed for use in performance measurement and risk management, the indices can also form the basis for exchange-traded funds (ETFs) tracking specific factor exposures.

Most recently O’Shares, a US-based ETF issuer, adopted the FTSE Global Factor Index Series for its debut product, the O’Shares US Quality Dividend ETF (OUSA).

In keeping with the series, both indices are based on the FTSE Developed and FTSE Emerging indices and use a common methodology framework to provide controlled exposure to the target factor, whilst considering levels of diversification and investment capacity.

The momentum factor indices provide exposure to stocks which have exhibited recent outperformance by selecting and weighting constituents based on their local currency total return over the previous eleven months. Historical observations have found that stocks that have outperformed over recent short-term time horizons will, on average, continue to do so. The financial theory behind the strategy is not as clear as the performance record, but researchers have posited that it could be the result of investors under-reacting to new information and being anchored to previous prices.

The selection and weighting methodology for the dividend yield factor indices is calculated based on each company’s historical dividend yield, based on the past twelve months. Dividend-paying companies should, in theory, be financially sound in order for them to meet their cash-flow requirements and, as dividend yield is inversely related to price, favouring high-dividend stocks should tilt the indices towards good value companies.

The new indices complement the existing single factors already calculated by FTSE Russell, namely; illiquidity, residual momentum, quality, size, value and volatility.

Peter Gunthorp, Managing Director of Research & Analytics at FTSE Russell, commented: “As highlighted in the 2015 FTSE Russell Smart Beta Survey, asset owners and their consultants are increasingly evaluating and adopting more sophisticated index strategies. As alternatively weighted and factor indices grow in popularity, we will continue to expand our offering to meet this growing demand. FTSE Russell will also support the expansion by providing market participants with education, information and index tools around these new approaches.”

There are a number of factor-based ETFs and indices competing for market share currently; however, the growth prospects in the smart beta space and demand for varying approaches should provide ample opportunity for providers to flourish.

Lyxor has released a series of smart beta factor ETFs based on JP Morgan indices which are designed to capture the low-size, value, quality, low-beta and momentum factors within European equities. iShares also provide a range of ETFs based on MSCI indices. These funds provide exposure to the quality, value, size and momentum factors across US and international equities. Other players active in the factor space include Deutsche Asset & Wealth Management, Source and Amundi, among others.

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