Dow Jones Indexes has launched the US Contrarian Opportunities Index.
The new rules-based index seeks to measure a "contrarian" investment strategy by focusing on companies with strong recent fundamentals but a lagging three-year-trailing return.
The index has been licensed to Javelin Investment Management to underlie an exchange-traded fund. The ETF will be available at NYSE Euronext.
"The Dow Jones US Contrarian Opportunity Index allows market participants for the first time to track a contrarian investment strategy with a rules-based tool," says Michael A. Petronella (pictured), president designate, Dow Jones Indexes. "The Dow Jones US Contrarian Opportunities Index is designed to systematically measure the performance of stocks that lag the broader market in terms of recent performance, but that outrank their peers based on fundamentals-based and other qualitative criteria."
The universe for the Dow Jones US Contrarian Opportunities Index is the Dow Jones US Broad Stock Market Index, which measures the performance of the largest 2,500 US stocks by float-adjusted market capitalisation.
These stocks are ranked in descending order by their three-year trailing total returns, and the 1,250 best-performing stocks are removed. The remaining stocks are then ranked in descending order by float-adjusted market capitalisation, and the lowest five per cent of stocks are removed.
The remaining companies join the current index components to form the selection pool and are further ranked by ten qualitative financial criteria: long-term expected profit growth; enterprise value to Ebitda; earnings-per-share revisions for the current fiscal quarter; earnings-per-share revisions for the next quarter; price/cash flow ratio to five-year median; cash-flow change in the previous quarter; price/earnings ratio; price/free cash flow ratio; total return for the past six months; and five-year sales growth.
For each of the ten factors, companies are scored based on their ranking; these scores are then summed in a final composite rank. Any existing component company whose composite rank falls from one to 175 will remain in the index, and non-component companies are selected based on composite rank until there are 125 stocks. Sector weighting is capped at 30 per cent of the index.