MSCI rolls out momentum indices; USA index lined up for iShares ETF

Mar 20th, 2013 | By | Category: ETF and Index News

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MSCI, a leading global index provider, has broadened its suite of smart beta ‘risk premia’ indices with the introduction of the MSCI Momentum Indices, initially comprising the MSCI ACWI Momentum Index and MSCI USA Momentum Index. The new indices, which are designed to reflect the performance of an equity momentum strategy, have already caught the eye of iShares, the world’s largest provider of exchange-traded funds (ETFs).

MSCI rolls out momentum indices; USA index lined up for iShares ETF

Numerous academic studies suggest that portfolios tilted towards stocks with high momentum have outperformed market-cap-weighted indices over the long run.

Numerous academic studies suggest that portfolios tilted towards stocks with high momentum have outperformed market-cap-weighted indices over the long run, especially in upward trending markets. Their low correlation with other risk premia strategies also means they sit well alongside value and low-volatility strategies and can help enhance portfolio diversification.

As a consequence, the indices represent a good accompaniment to MSCI’s existing MSCI Value Weighted and MSCI Minimum Volatility indices, which, when blended together, can deliver superior risk-adjusted returns compared to conventional market-cap-weighted indices.

Dimitris Melas, Managing Director and Head of New Product Research at MSCI, said: “Designing an index that captures momentum risk premia involves unique challenges: momentum strategies require frequent rebalancing leading to high turnover and may suffer sharp drawdowns in periods of market turmoil,”

He added: “The MSCI Momentum Indices address these challenges by incorporating innovative features such as risk-adjusted return calculations and ad-hoc rebalancing triggered by spikes in market volatility. These aim to ensure that the indices capture momentum risk premia with reasonable turnover and moderate drawdowns during periods of high market volatility.”

The initial indices in the suite are based on the MSCI ACWI and MSCI USA indices (the parent indices). The MSCI ACWI provides exposure to large and mid-cap stocks across 24 developed markets and 21 emerging markets countries, while the MSCI USA captures large and mid-cap stocks of the US market.

A fixed number of securities with the highest momentum scores from the parent index are included in each momentum index, generally covering about 30% of the parent index market cap. A momentum score is determined for each stock in the parent index by combining the stock’s recent 12-month and 6-month local price performance. This momentum value is then risk-adjusted to determine the stock’s momentum score. Constituents are then weighted by the product of their momentum score and their market cap, capped at 5%.

The indices, which will be added to later this year, have been designed for use as benchmarks for momentum investment strategies or as the basis for financial products such as ETFs. Indeed, the MSCI USA Momentum Index has already been licensed by BlackRock to underlie the iShares MSCI USA Momentum Index ETF, which is currently pending approval from US regulators. When the new fund arrives – probably sometime this year – it  will complement iShares’ existing smart beta ETFs, which currently provide exposure to growth, value, large-cap, mid-cap, small-cap, high income and minimum volatility strategies.

For immediate exposure to a momentum strategy in ETF format, investors have a range of options at their disposal. Products to consider include the SPDR S&P 1500 Momentum Tilt ETF (MMTM) from SSgA SPDRs; the QuantShares US Market Neutral Momentum ETF (MOM) from market neutral specialist QuantShares; the PowerShares DWA Technical Leaders ETFs, covering developed markets, emerging market sand small caps stocks, from Invesco Powershares; and the ALPS/GS Momentum Builder Index ETFs, based on a strategy developed by Goldman Sachs. All listed on the NYSE Arca.

As yet, no such products are available to UK/European investors on local European exchanges.

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