Stoxx has launched the Dow Jones Stoxx 600 Optimised Supersector Indexes, a series of European sector indexes developed in collaboration with Source, a provider of exchange-traded produ
Stoxx has launched the Dow Jones Stoxx 600 Optimised Supersector Indexes, a series of European sector indexes developed in collaboration with Source, a provider of exchange-traded products.
Key factors addressed in the construction of the new equity indexes are concentration, diversification, liquidity and availability to borrow stocks in the index.
Source has licensed 18 of the 19 sectors as index benchmarks for exchange-traded funds, which will be launched in the coming weeks.
One of the defining features of the indexes is that they will be the first to take into account the ability to borrow a stock in the stock lending market, a key component in facilitating active trading in the underlying index constituents and related products. Stoxx uses data provided by Data Explorers, an independent provider of stock lending and short interest information.
"With the launch of the Dow Jones Stoxx 600 Optimised Supersector Indexes we are taking an innovative approach to creating sector index products by focusing even more on improved liquidity and diversification," says Ricardo Manrique, chief executive officer, Stoxx. "The even greater degree of underlying liquidity is achieved by concepts such as applying a special liquidity weighting factor to each component and incorporating a stock’s availability to be borrowed. In addition, a new component weighting cap scheme assures Ucits-III compliance."
Ted Hood, chief executive officer, Source, adds: "we are very excited about the new Dow Jones Stoxx sector indexes and the ETFs that Source will bring to market in the very near future. We believe that the result of this design process and cooperation, which involved Stoxx, Source and some of the largest trading counterparties on both the buy and sell side of the markets, will offer significant value and choice to European investors. We are very pleased to have been a partner with Stoxx in this process and we view it as a model for the construction of new and improved indexes and exchange-traded products."
The initial index universe for the indexes is the stocks in the Dow Jones Stoxx 600 Index. Stocks from Iceland and Greece are then removed. The remaining stocks are ranked by two liquidity measures: average daily turnover value to market free float; and availability to borrow. Availability to borrow data is provided by Data Explorers. The firm analyzes daily stock lending and short interest information gathered from borrowers, lenders and intermediaries to create a view of the securities lending market. Up to 60 stocks with the lowest liquidity are removed from the index.
The remaining stocks are then divided into the 19 super sectors based on their industry classification benchmark. Each sector is then optimized using an innovative approach to single stock weighting. This approach applies a sector-dependent liquidity factor against the float-adjusted market capitalization weight of each remaining stock in the super sector, reducing the weight of those with high ADTV ratios while preserving the weight of those components which are more liquid. Finally, the largest stocks in each super sector are capped at between ten per cent and 20 per cent depending upon the number of stocks in that sector.
The stocks are categorized into the following 19 super sectors according to the ICB: automobiles and parts, banks, basic resources, chemicals, construction and materials, financial services, food and beverage, healthcare, industrial goods and services, insurance, media, oil and gas, personal and household goods, real estate, retail, technology, telecommunications, travel and leisure and utilities.