Lyxor has expanded its popular suite of quality income ETFs with the launch of the Lyxor SG Japan Quality Income UCITS ETF. Availalbe on the London Stock Exchange and Euronext Paris, the multi-factor smart beta ETF offers investors exposure to high-quality Japanese stocks (excluding financials) that also pay high dividends.
This ETF is the second quality income ETF from Lyxor. The first, the Lyxor Global Quality Income UCITS ETF, has gathered $1.4bn in assets.
The ETF tracks the SG Japan Quality Income Index which uses a three-step smart beta process designed by Andrew Lapthorne, Global Quantitative Research Strategist at Societe Generale.
Commenting on the launch, Lapthorne said: “We felt that the time was right to apply our quality income strategy to Japan, as the country has finally emerged from a long period of normalisation following the effects of the stock market bubble of the late 1980s.
“Today, Japanese stocks have dividend yields comparable to the US equity market but with the best dividend cover of any developed country in the world, so these dividends are well supported by profits. Balance sheets are also relatively unleveraged and 50% of companies actually hold more cash than debt. Put this all together and for the first time in a long time, Japan is now capable of supporting a quality income strategy.”
In the first stage of the index construction, stocks from the TOPIX 1000 (excluding those in the financial sector) are given a quality ranking using the Piotroski score and the Merton model.
Named after its creator, Chicago accounting Professor Joseph Piotroski, the Piotroski score assigns a score of between 0 and 9 based on the strength of a company’s financial position. Factors considered are: return on assets, operating cash flow, change in return on assets, accruals, change in leverage, change in current ratio, change in number of shares, change in gross margin and change in asset turnover ratio.
The Merton model, named after the economist Robert Merton, is used to assess a company’s risk of credit default. The model is similar to the Black-Scholes option pricing model and assesses the probability that the company’s assets will fall below a default point calculated as the sum of current liabilities and half of all long-term liabilities.
To be added to the index, a stock must have a Piotroski Score of 7 or higher, a Merton score that ranks in the top 40% of the universe, a dividend yield that ranks within the top 40% of the universe and meet certain liquidity and size constraints. Stocks that meet these criteria are then added to the index in order of dividend yield until there are 60 stocks in the index. Once in the index, rules for remaining in the index at rebalance are relaxed slightly to reduce turnover.
Currently, the notable sector weightings in the index are consumer discretionary (22.9%), industrials (20.3%), information technology (15.4%) and healthcare (14.1%). The largest individual components are Disco, Denso and Taisei, each with a weighting of around 2.2%.
The index has recorded impressive gains in recent years, returning 14.1% per annum in the last three years compared to 7.1% seen by the MSCI Japan Index and 6.5% returned by the MSCI World Index over the same period.
The ETF trades on the LSE in dollars and on Euronext Paris in euros. It uses a swap-based replication approach and has a total expense ratio of 0.45%.
Francois Millet, head of product line management – ETFs & indexing at Lyxor, said: “We now offer a full suite of quality income strategies for investors who crave stability in their income strategy.”
Other ETFs in the Lyxor/SG quality income line-up include the Lyxor SG Global Quality Income UCITS ETF (LON: SGQL). This fund has proved very popular with investors, amassing $1.4 billion in assets since its debut in January 2013.