Lyxor Asset Management has launched four exchange-traded funds on the London Stock Exchange offering access to the fundamental index methodology devised by US firm Research Associates, whi
Lyxor Asset Management has launched four exchange-traded funds on the London Stock Exchange offering access to the fundamental index methodology devised by US firm Research Associates, which is becoming increasingly popular as an alternative to traditional, market capitalisation-weighted indices.
The new ETFs are linked to FTSE RAFI indices that cover the US, Europe, the eurozone and Japan, and seek to outperform traditional market-weighted indices with lower levels of volatility. The indices weight index constituents using four fundamental factors, dividends, cash flow, sales and book value.
The Lyxor ETF FTSE RAFI US 1000 is based on the FTSE RAFI US 1000 Index, comprising the thousand largest US-listed companies by fundamental value, selected from the constituents of the FTSE USA All Cap Index.
The Lyxor ETF FTSE RAFI Europe is based on an index comprising European stocks among the constituents of the FTSE RAFI Global ex US 1000 Index, and covers Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the UK
The Lyxor ETF FTSE RAFI Eurozone is based on an index incorporating each country using the euro that is represented in the FTSE RAFI Developed ex US 1000 Index. Its constituents are drawn from Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain.
The Lyxor ETF FTSE RAFI Japan comprises each Japanese stock in the FTSE RAFI Developed ex US 1000 Index.
Research from RAFI indicates that fundamentally-weighted indices outperformed comparable market cap-weighted indices across a number of leading developed markets, including the US, Europe and Japan. For example, back-testing suggests the FTSE RAFI US 1000 index would have outperformed the MSCI USA market cap-weighted index by an average of 2.9 per cent annually between 1970 and December 2006.
‘There is currently a very healthy debate among investment industry leaders about identifying ways of improving upon the traditional market cap-weighted approach to indexing,’ says Daniel Draper, head of Lyxor ETFs for the UK, Ireland and the Nordic region. ‘Innovations in index construction and performance attribution as well as improved efficiencies in trading have turned theory into practice.
‘The FTSE RAFI indices weight their components using dividends, price-to-book, free cash flow and revenues. This idea is based on the belief that certain intrinsic factors can estimate the long-term value of stocks better than current market prices, as prices tend to reflect various investor behavioural biases in the short-to-medium term. We are delighted to be making fundamental indices more accessible to both institutional and retail investors.’
Justin Urquhart Stewart, director of Seven Investment Management, and frequent user of ETFs, adds: ‘The FTSE RAFI Indices are welcome complements to the range of ETFs currently available to UK investors.’
‘There is evidence to suggest that, in addition to outperformance, fundamental indices also have a lower volatility than market cap-weighted indices and do not suffer as strongly from market turbulence. It is, of course, still early days but this could certainly be a very exciting area of investment for the future.’
All four Lyxor FTSE RAFI ETFs will charge a management fee of 0.75 per cent. Quotations for the funds will be available in US dollars as well as sterling.
Established in 1998 as a wholly-owned subsidiary of France’s Société Générale, Lyxor currently manages EUR72.8bn in alternative investments, structured products and index tracker funds, with EUR26.1bn in ETF assets at the end of November and a European market share of 31.7 per cent as of January 8. It offers a range of equity, bond, commodity and sector index ETFs listed on seven European stock exchanges as well as six each in Singapore and Hong Kong.