The indexing division of the New York Stock Exchange (NYSE) has unveiled a new family of indices that aims to isolate pure sector returns by hedging market risk. The indices are designed to serve as the basis for investable index-linked products, such as exchange-traded funds.

The NYSE US Pure Exposure Index Family offers investors the ability to act on persistent trends in pure sector performance, whether positive or negative. In addition, while the returns of conventional sector indices are highly correlated, the returns of pure sector indices are largely uncorrelated, creating new hedging and portfolio allocation tools.

The NYSE Pure Exposure Indices hedge out market risk through short positions in the SPDR S&P 500 ETF Trust (SPY).

The strategies behind the pure sector indices have been designed by two US-based analytics firms, Verus Analytics and AlphaBetaWorks. Verus Analytics provides quantitative testing and a validation engine for index composition, while AlphaBetaWorks’ proprietary statistical equity risk model estimates market beta for each index member individually and then aggregates these into the index market beta. The pure exposure sector indices hedge out market exposure via short positions in the SPDR S&P 500 ETF Trust (SPY).

Steve Crutchfield, NYSE Head of ETPs, Options and Bonds, commented: “This unique bottom-up approach to hedging market risk employs a robust regression-based methodology for beta calculation and responds dynamically to changes in the index composition, in contrast to more traditional top-down approaches. The resulting pure exposure indices offer investors a novel approach to sector investing.”

“We believe these indices will be the foundation for new and innovative ways to gain and adjust sector exposures within equity portfolios,” said Tom Barrett, Chief Investment Strategist at Verus Analytics. “There are multiple compelling applications including sector rotation, tactical strategies, risk management, and performance attribution, which will appeal to all types of equity investors.”

Grigori Kapoustin, Principal at AlphaBetaWorks, added: “We are pleased to provide this pioneering solution to index users’ needs. By eliminating problematic collinearity among factors, capturing true inter-sector relationships, and revealing persistent trends in pure sector performance, these indices offer an edge in hedging, statistical analysis and systematic strategies.”

The indices include:

NYSE US Pure Exposure Consumer Goods Sector Index
NYSE US Pure Exposure Consumer Services Sector Index
NYSE US Pure Exposure Energy Sector Index
NYSE US Pure Exposure Financials Sector Index
NYSE US Pure Exposure Healthcare Sector Index
NYSE US Pure Exposure Industrials Sector Index
NYSE US Pure Exposure Basic Materials Sector Index
NYSE US Pure Exposure Technology Sector Index
NYSE US Pure Exposure Utilities and Telecommunications Sector Index