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Hartmut Graf, chief executive officer, Stoxx

STOXX launches new suite of smart beta indices

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STOXX has launched a new suite of smart beta indices, the STOXX Select and STOXX Diversification Select index families. Derived from major STOXX benchmarks, they measure the performance of companies with low volatility, high dividend yield, and – in the case of the STOXX Diversification Select Indices – low correlations.

Index components are weighted by the inverse of their volatility.
 
The STOXX Select and STOXX Diversification Select index families are specifically designed as liquid underlyings for financial products such as exchange traded-funds and structured products. The combination of low volatility, high dividend and low correlation screens in the index methodology sets an attractive pricing framework especially for the latter of these products.
 
“STOXX, as the marketing agent for the DAX indices, is the leading index provider in the structured products space, both in Europe and on a global level,” says Hartmut Graf (pictured), chief executive officer, STOXX Limited. “Drawing from this extensive experience, we have now introduced the STOXX Select and STOXX Diversification Select Indices, which meet both structured products issuers and end-investor needs by introducing screens for low volatility, high dividends and low correlation, paired with an inverse volatility weighting scheme.”
 
The universe for each index in the STOXX Select and STOXX Diversification Select families is the respective parent index. For the STOXX Select Indices, all companies are screened for data availability and liquidity. From the remaining stocks, those with high volatility are excluded, and those with high dividend payments are selected. For the STOXX Diversification Select Indices, an extra screening is added at as a first step: those stocks whose average correlation with other stocks from the base universe is too high are excluded as well. In order to ensure that these screens are applied in a balanced way, an “Equal Strength Ratio” is calculated, which sets a variable threshold for the exclusions and additions, according to the number of stocks that remain in each index after the initial data availability and liquidity screens.
 
The volatility and correlation are calculated on prices which are in the currency of the final index. Thus, one index calculated in euro might have a different composition than another similar index based on the same benchmark but calculated in US dollar. For example, the STOXX Global Select 100 EUR and the STOXX Global Select 100 USD should be seen as two different indices, since the first one’s composition has been calculated based on parameters calculated on euro prices while the second one used parameters calculated on US dollar prices.
 
The constituents in the STOXX Select and STOXX Diversification Select indices are weighted according to the inverse of their volatility, with a cap at 10%.

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