Zurich-based index provider Stoxx has launched a new global equity index – iSTOXX Global Cities of Tomorrow Select 30 Index – that aims to capture the economic upside of companies exposed to the transformation and growth of ‘smart cities’ in the digital era.
Smart cities use data and technology to create efficiencies, improve sustainability, and enhance the quality of life.
Smart cities use data and technology (primarily through ‘Internet of Things’ sensors) to create efficiencies, improve sustainability, and enhance the quality of life.
Data collected from citizens, devices, and assets are analyzed to manage and improve infrastructure such as traffic and transportation systems, power plants, water supply networks, waste management, crime detection systems, information systems, schools, libraries, and hospitals.
For example, data on pedestrian concentrations in Amsterdam has allowed municipal councils to save energy by dimming streetlights in areas with lower footfall.
The index homes in on the smart city theme while also accounting for sustainability criteria as well as low-volatility and high-dividend screening.
According to Stoxx, the index can be used as the foundation for thematic investment products such as ETFs.
Methodology
The selection process starts by ranking all stocks in the STOXX Developed and Emerging Markets Total Market Index in descending order according to their ESG (environmental, social, and governance) scores as calculated by Sustainalytics. The lowest-rated 50% of companies are excluded.
Thereafter, a norms- and product-based filter removes companies that are non-compliant with the United Nations Global Compact principles of human and labour rights, the environment, and anti-corruption. Firms involved in activities with negative ESG implications, such as controversial weapons, gambling, adult entertainment, thermal coal, nuclear power, aerospace and defence, tobacco, and oil & gas are also removed.
Stoxx then turns to data provider FactSet to sharpen exposure to the smart city theme. It uses FactSet’s Revere Business Industry Classification System (RBICS) to screen for firms that derive at least 25% of their revenue from the aggregate of 293 relevant sectors.
According to Stoxx, these sectors make up a comprehensive catalogue of modern-day urban activities and include wireless services, metal recycling, passenger rail transportation, and mortgage loan servicing, among others.
The remaining constituents are sorted by the maximum of their three- or twelve-month price volatilities. Half the selection pool making up the most volatile stocks are removed.
The methodology then selects the 30 stocks with the highest dividend yields to form the final index with 12 securities chosen from North America, 10 from Europe, and 8 from the rest of the world. Country and sector caps are also applied.
Constituents are weighted by the inverse of their historical volatility, and reconstitution and rebalancing occur quarterly.