Markit to develop smart beta iBoxx indices

Dec 9th, 2015 | By | Category: Fixed Income

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Markit, the firm behind the iBoxx range of indices, has announced the launch of a rules-based framework designed for the creation of systematic factor-based – or “smart beta” – fixed income indices.

Markit to develop smart beta iBoxx indices

Markit to develop smart beta iBoxx indices (File image. © 2015, Nasdaq, Inc)

A common criticism of traditional market-capitalisation weighted bond indices is that the methodology assigns weights based on the amount of debt issuance outstanding, thereby exposing investors to those companies or countries with the most debt and, potentially, therefore, a higher probability of financial distress.

Markit’s new economic structure avoids this potential drawback by weighting fixed income indices based on fundamental macroeconomic factors including productivity, inflation, and relative competitiveness. In this way, the methodology not only provides insight into the relative health of countries or regions but theoretically tilts towards those of higher quality.

Markit has initially launched indices based on GDP growth, purchasing managers’ indices (PMI), inflation, unemployment rate, national debt to GDP ratio, history of default and global competitiveness.

Ibrahim Kara, Director and Head of Index Research at Markit, commented: “Our framework enables us to build indices based on internal and external factor models, while ensuring the replicability of the index. This new offering complements our traditional market value-weighted and liquidity focused indices.”

More than $80bn in ETF assets are linked to iBoxx indices, of which more than $4bn is linked to alternatively weighted iBoxx indices.

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