The New York Stock Exchange, in collaboration with Zebra Capital Management, has launched the NYSE Zebra Edge Index, incorporating leading behavioural finance research on high-turnover, or “popular” stocks, with the goal of capturing higher returns with lower volatility. The US large cap equity index may serve as the underlying for future investment products including exchange-traded funds.
Professor Ibbotson, Founder and Chief Investment Officer at Zebra Capital Management.
The smart beta index is founded on academic research demonstrating the relationship between highly-traded stocks and returns by economist Professor Roger Ibbotson, a respected thought leader in behavioural finance. It is composed of large cap equities after high volatility stocks as well as overly popular, or high-turnover, stocks, while using a proprietary risk control overlay to target a specific level of portfolio volatility.
The methodology seeks to avoid so-called ‘hot stocks’ – those that have experienced the highest trading frequency over the last two years and the highest volatility over the last three months and one year.
All constituents are equal weighted at the time of rebalancing which occurs on a quarterly schedule.
“Our research in behavioural finance shows that the most popular stocks tend to experience higher volatility and provide lower future returns,” said Professor Ibbotson, Founder and Chief Investment Officer at Zebra Capital Management. “By removing the most popular and the most volatile stocks, you are left with less popular, less volatile stocks which have historically provided higher returns with less risk.”
Using back-tested data from 6 July 2000 to 31 January 2017, the index has returned 5.5% per annum with an annualized volatility of 5.1%.
“We’re delighted to partner with Roger and the team at Zebra Capital Management to launch the NYSE Zebra Edge Index,” added Dwijen Gandhi, Head of NYSE Indices at Intercontinental Exchange. “Innovation is one of the hallmarks of the NYSE, and this cutting-edge index is the first NYSE index to be used in an insurance product, exclusively licensed to and available with the Nationwide New Heights fixed indexed annuities.”