Stoxx expands smart beta offering with Sharpe ratio index family

Feb 19th, 2015 | By | Category: ETF and Index News

Stoxx, a leading European index provider, has unveiled the Stoxx Sharpe Ratio Indices, a first-of-its-kind index family that selects components based on their Sharpe ratios. A security’s Sharpe ratio measures its risk-adjusted return.

Stoxx expands smart-beta offering with Sharpe ratio index family

William F. Sharpe, Nobel Prize-winning economist and creator of the Sharpe index.

The indices, which fall squarely into the “smart beta” camp, have been designed for use as underlyings to index-linked investment products such as exchange-traded funds (ETFs) or as benchmarks for actively managed funds.

The inaugural line-up comprises global and regional indices which include stocks from their respective parent benchmarks that have the highest Sharpe ratios, while excluding those with low dividend yields and low liquidity.

The Stoxx Europe Sharpe Ratio 50 Index, for example, is based on the Stoxx Europe 600 Index. Companies in this parent index that have an average six-month daily traded volume (ADTV) above one million euros (the threshold is five million euros for the Global version) and are among the top 20% of dividend payers are eligible for inclusion in the index. Those 50 companies with the highest one-year Sharpe ratios make up the index.

Each regional index – Europe, North America, Asia/Pacific – has 50 components. The Global version has 100. Index components are weighted according to the inverse of their one-year volatility. The indices are reviewed quarterly and components are subject to a 10% cap. The indices are calculated in price, net and gross return versions in euro and US dollars.

All indices use Stoxx GC Pooling EUR 12 Months as the risk-free rate. The Stoxx GC Pooling Index family is based on the Eurex Repo GC Pooling Market and offers a transparent, rules-based, independent alternative to unsecured interbank benchmarks such as Libor and Euribor/Eonia.

Commenting on the launch, Hartmut Graf, CEO at Stoxx, said: “The Sharpe ratio takes into account both risk and return, and this index family offers an effective and transparent tool to target those companies that offer some of the most attractive risk-adjusted returns. The Stoxx Sharpe Ratio index family is an important addition to our smart beta offering, which includes several other indices, such as Minimum Variance, Strong Quality, Strong Balance Sheet, among others.”

Arnaud Jobert, managing director and head of Structuring at investment bank JP Morgan, which is the first company to license the new index suite, said: “The Stoxx Sharpe Ratio index family allows investors to gain access to a diversified basket of shares, which had historically the highest risk adjusted returns. The objective is to provide exposure to the stocks that have performed better historically, relative to the risk investors would have taken.”

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