TSE and Nikkei unveil Japan mid & small-cap quality index

Mar 21st, 2017 | By | Category: Equities

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Tokyo Stock Exchange (TSE) and Nikkei have launched the JPX-Nikkei Mid and Small Cap Index tracking the equities performance of approximately 200 small and mid-cap stocks that are selected using a smart beta approach with a focus on quality companies. The new launch is based on the same concept as the popular JPX-Nikkei 400 Index.

JPX-Nikkei Small and Mid Cap Index launched

The JPX-Nikkei Small and Mid-Cap Index has returned 22% annually over the last five years according to back-testing.

The universe of eligible stocks comprises all stocks traded across all sections of the TSE, namely the 1st section (large-caps), 2nd section (mid-caps) Mothers (high growth companies) and the JASDAQ (emerging companies). The stocks that represent the top 20% of market capitalisation are removed with the remaining firms being ranked according to quantitative and qualitative metrics designed to favour high-quality stocks.

The quantitative score is made up of 3-year average return on equity (70% weight) and 3-year cumulative operating profit (30% weight). The qualitative score consists of measures designed to test corporate governance including the number of independent company directors, the adoption of international financial reporting standards and the disclosure of earnings information in English.

The 200 stocks with the highest combined quantitative and qualitative scores are selected for inclusion in the index, and weighted by market capitalisation with a single issuer cap of 1.5%. The index constituents are reviewed annually.

Using back-tested data, the index returned 22% annually over the past five years, compared with 15% for the JPX-Nikkei 400, with both indices recording around 18% annualised volatility.

The JPX-Nikkei 400 has fast established itself as an important reference benchmark for the Japanese equity market since its debut in 2013. The index is tracked by ETFs from Lyxor, Source, Nomura, Amundi, Deutsche Asset Management and iShares, which are available in a range of trading currencies and currency-hedged versions. The largest is the Lyxor JPX-Nikkei 400 UCITS ETF (LON: JPXG) which has AUM of £810m and an expense ratio of 0.25%. The cheapest available is the Amundi ETF JPX-Nikkei 400 UCITS ETF (LON: JPHG) which has £690m AUM and an expense ratio of 0.18%

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