German index engineer Solactive has launched the Solactive Stable Income Europe Index, which is designed to replicate the performance of 50 European shares selected on the basis of a screening strategy blending together free cash flow yield, dividend yield and low volatility characteristics.
The index targets investors interested in a smart beta concept that puts more emphasis on the role played by free cash flow yield, aside from tilting composition towards high dividend and low volatility shares.
Free cash flows are typically used to provide an insight into a company’s financial health. Being closely related to earnings, they can give investors an indication of future shareholder dividends, the company’s reinvestments plans and its ability to fulfil financial obligations.
As such, the Solactive Stable Income Europe Index applies at first a free cash flow yield filter which selects the top performing shares in each sector. Companies are then assigned a composite score which combines low volatility and high dividend yield criteria. Only the top 50 companies with the highest score are then chosen as index components.
The index is licensed to Societe Generale Corporate & Investment Banking and will be used as an underlying asset for structured solutions.
Steffen Scheuble, CEO of Solactive, says: “Nowadays many indices and financial products are constructed around high dividend yield and low volatility concepts. The Solactive Stable Income Europe adds another element into the mix by screening shares also on free cash flow yield, therefore providing an additional filter to evaluate companies’ resilience.”
Daniel Fermon, head of thematic research at Societe Generale Corporate & Investment Banking, adds: “In a constantly changing economic environment, investing in companies which offer high free cash flow visibility and robustness is a compelling strategy. Societe Generale is pleased to partner with Solactive on the launch of this new index as we expect this long-term investment thematic to remain key for investors.”
The Solactive Stable Income Europe Index is calculated as a price return index denominated in EUR. Constituents must have a free float market capitalisation of at least EUR200 million and a 120-day ADV of at least EUR1 million.
The three most represented sectors in the index are finance, industrials and technology with a composite weight of 76 per cent as of the last rebalancing day. The three countries with the highest weight are France, Germany and Switzerland reaching 66 per cent of the index total.
The index is weighted equally and rebalanced quarterly.