Smart beta specialist Ossiam has added a sustainable ETF to its product suite offering access to Nobel Prize-winning economist Professor Robert Shiller’s cyclically adjusted price-earnings (CAPE) methodology.
Professor Robert Shiller.
The Ossiam ESG Shiller Barclays CAPE Global Sector UCITS ETF has been listed on Xetra in US dollars (Ticker: 5HGU GY) and euros (5HGE GY) with further listings on other European stock exchanges expected in the near future.
The original CAPE ratio, devised by Professor Shiller and his graduate student John Campbell in 1981, has become a widely used valuation metric providing a view on equities being over- or under-valued.
It is calculated by dividing the current market value of a security’s shares by its average, inflation-adjusted earnings over ten years to remove the effects of the business cycle. By comparing this figure to historical averages of other securities, the ratio provides insight into how companies are relatively valued.
Professor Shiller extended the CAPE measure to equity sectors and, in collaboration with Barclays, designed the Shiller Barclays CAPE Sector Indices. The indices use the Relative CAPE indicator, a normalized version of the CAPE ratio, supplemented with a momentum filter, as a valuation driver in a sector rotational strategy.
The ETF is actively managed but aims to deliver a risk/return profile similar to the Shiller Barclays CAPE Global Sector Net TR Index while integrating ESG characteristics.
The index begins with a universe of ten sector-specific sub-indices of the large and mid-cap MSCI World Index. The ten sectors are communication services, consumer discretionary, consumer staples, energy, financials, health care, industrials, information technology, materials, and utilities.
The methodology identifies the five most undervalued sectors, according to the Relative CAPE Indicator. It then removes one sector with the lowest 12-month momentum and equally weights the four remaining sectors.
Rebalancing occurs monthly with the index’s final allocation consisting of a mix of the sector basket identified in the current rebalancing and the baskets identified in several of the most recent previous rebalances.
The new ETF follows the above process but also includes an ESG filter that guides which stocks from the chosen indices may be invested in and which should be avoided.
Specifically, the ESG filter excludes violators of UN Global Compact principles and companies involved in controversial weapons, tobacco, or the coal industry. Additionally, the strategy includes a best-in-class selection filter that screens for companies with superior ESG ratings compared to their industry peers.
The ETF comes with an expense ratio of 0.75% and is classified as an Article 8 product under the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
Ossiam’s existing suite of ETFs linked to Shiller Barclays CAPE Sector Indices includes three non-ESG funds based on global, US, and developed European equity markets, as well as a low-carbon version of the US equity strategy. The entire range houses over $4.6 billion in assets.
Bruno Poulin, CEO of Ossiam, commented: “By launching an ESG version of the global equities fund, we aim to offer investors with a responsible investment mandate the proven advantages of the Shiller strategy. It combines an investment roadmap to dynamically select attractive sectors with ESG filters to invest in companies with the highest sustainable profile.”