Comparing historical back tested performance and current sector composition of a new multi-factor combination index from FTSE Russell relative to its parent index offers valuable insight for European equity investors.
The FTSE Developed Europe Qual / Vol / Yield 5% Capped Index was introduced in 2015 as a tool for investors to measure the performance of high quality large and mid cap stocks of developed European markets exhibiting relatively low volatility and high dividend yields. Index constituents are selected from the FTSE Developed Europe Index and weighted based on quality, volatility and yield characteristics, with individual index constituents capped at 5% quarterly to avoid over concentration.
Kevin O’Leary, Chairman of O’Shares, “Shark Tank” cast member and CNBC contributor:
“Comparing performance of the FTSE Developed Europe Qual/Vol/Yield Factor 5% Capped Index to the performance of the FTSE Developed Europe Index helps provide insight into the effects of selecting high quality, low volatility European stocks that pay consistent dividends. Multi-factor indexes like this which include stocks with specific characteristics are an important and innovative new tool for examining markets and creating investable products.”
The FTSE Developed Europe Qual / Vol / Yield 5% Capped Index has recorded returns of more than 9% annually from September 30, 2003 through June 30, 2016 (on an historical back tested basis) as compared to a 6.75% annualized return for the FTSE Developed Europe Index for the same time period, with a lower annualized volatility.
Source: FTSE Russell. Data covers September 30, 2003 to June 30, 2016. Past performance is no guarantee of future results. Returns may reflect hypothetical historical performance. Please see the disclaimer for important legal disclosures.
The current sector composition of the FTSE Developed Europe Qual / Vol / Yield 5% Capped Index relative to the FTSE Developed Europe Index demonstrates its weighting toward higher quality, lower volatility, higher yielding European stocks.
As of June 30th, the highest performing sector year-to-date within the FTSE Developed Europe Index was Oil & Gas (+18.51%), with Financials the lowest performing sector (-20.95%). As shown in the charts below the FTSE Developed Europe Qual / Vol / Yield Factor 5% Capped Index was 5.75% overweight Oil & Gas and 8.47% underweight Financials relative to the FTSE Developed Europe Index as of June 30.
Brad Zucker, senior product manager, FTSE Russell:
“Our clients are using smart beta indexes to pursue a wide range of objectives, notably return enhancement, risk management and diversification. And our analysis continues to show that combining multiple factors, not just a single factor, in a smart beta index can help market participants see diversification at a more granular level to view the global markets in a new and unique way.”
For a deeper dive into multi-factor smart beta indexes from FTSE Russell, go to the FTSE Russell website.
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