STOXX Limited has launched the EURO iSTOXX 50 Equal Risk Index, which applies an equal risk contribution (ERC) concept to the EURO STOXX 50 Index in order to spread the overall risk of the portfolio equally between the 50 index components.
The new index, which is based on the Modern Portfolio Theory, aims to achieve maximum risk diversification.
The EURO iSTOXX 50 Equal Risk Index has been initiated by and licensed to Lyxor to underlie an exchange-traded fund, which will be listed on NYSE Euronext Paris.
“The new EURO iSTOXX 50 Equal Risk Index applies a sophisticated and innovative equal risk contribution concept to the leading blue-chip index for the Euro-zone,” said Hartmut Graf, chief executive officer, STOXX Limited. “Equal risk contribution concepts combine elements of minimum variance and equal-weight strategies, and offer market participants an alternative to those regarding overall portfolio risk, risk budgeting and diversification.”
"The ERC concept underlying the EURO iSTOXX 50 Equal Risk Index is backed-up by a number of academic publications, including Lyxor’s research. It provides the highest diversification of risk among all constituents of the original index while preserving its passive investment philosophy,” said Francois Millet, Indexing Product Line Manager at Lyxor. “The new index offers investors access to the efficient diversification of ERC, based on the flagship Euro-zone index.”
The EURO iSTOXX 50 Equal Risk Index has the same composition as the EURO STOXX 50 Index. However, the new concept applies an equal risk contribution strategy to the underlying index to allocate the risk contribution of the components equally. In order to do so, at the monthly rebalancing a covariance matrix is calculated for the 50 components of the EURO STOXX 50 Index, using the single components’ closing prices over the trading days of the past year. This covariance matrix determines the components’ weights in the new EURO iSTOXX 50 Equal Risk Index in such a way, that all 50 stocks account for the same amount of risk in the overall index.
The EURO iSTOXX 50 Equal Risk Index is available in price, net and gross return versions and calculated in Euro and US dollars. All index versions are available end-of-day, except for the Euro net return version, which is available real time.