Dow Jones Indexes, a leading global index provider, has announced the launch of the Dow Jones RBP US Directional Allocation Index, a unique gauge that automatically allocates weights among other indexes that reflect distinct viewpoints on the US market.
Constructed as an “index of indexes,” the new gauge reallocates among an “aggressive” index, a “defensive” index and a “market” index—while also allowing the possibility to allocate fully to a cash component—based on an automated system that uses economic and market indicators as inputs.
The Dow Jones US RBP Directional Allocation Index is the latest addition to the Dow Jones RBP Index series offered by Dow Jones Indexes and Transparent Value, a New York-based asset management and financial information services company. The Dow Jones RBP Indexes are built upon a methodology using proprietary, rules-based analytics supplied by Transparent Value.
The proprietary metric upon which all Dow Jones RBP Indexes are built is RBP, which stands for Required Business Performance. Transparent Value calculates RBP by reversing a traditional discounted cash flow model to measure the future business performance required for a company to support its current stock price. The goal is to measure the likelihood that the company can deliver such required business performance by applying the RBP methodology over specified time periods.
In May 2010, Dow Jones Indexes and Transparent Value announced that they had expanded the Dow Jones RBP Index family to include Dow Jones RBP Directional Series Indexes, which underlie the index launching today. These “directional” indexes were designed to reflect distinct market viewpoints, integrating the Dow Jones RBP Index methodology into measures geared toward investors with bullish, bearish and neutral views of the market.
“With today’s launch we’ve further supplemented the toolkit available to those seeking sophisticated measures of the US market,” said Michael A. Petronella, President, Dow Jones Indexes. “The Dow Jones RBP US Directional Allocation Index is the first index of its kind seeking to account for the current market environment.”
Julian Koski, Managing Director and Co-Chief Executive Officer of Transparent Value, said: “We developed these indexes in response to feedback we received in the marketplace. Advisers liked the approach of the Dow Jones RBP Directional Series Indexes, but were looking for an automated solution that incorporated a cash component.”
The allocation mechanism used in the new index’s methodology utilises a “moving average crossover system,” as it is known, to generate signals for rebalancings by comparing moving averages of economic and market indicators.
The primary indicators considered for the Dow Jones RBP US Directional Allocation Index include: a 12-month simple moving average (SMA) of The Conference Board Consumer Confidence Index, a 6-month SMA of The Conference Board Leading Economic Index (LEA), and a 250-day SMA of the Dow Jones US Large Cap Total Stock Market Index. In addition, 250-day SMA of the Dow Jones RBP Directional Series Indexes is used as a secondary indicator to test the validity of the primary indicator.
The new index is rebalanced quarterly, and after the close of any Friday if LEI moves above or below its moving average on the snapshot day, which occurs three business days prior to the rebalance day. Back-tested historical index values are available daily back to 31 December, 1999, the date at which the index base value is set at 1000.
For investors looking to gain exposure to the Dow Jones RBP range via ETFs, they may not have to wait too long. Back in September 2011, Transparent Value filed paperwork with the US Securities and Exchange Commission (SEC) to launch a series of US-listed ETFs tracking a number of Dow Jones RBP indices. The ‘exemptive relief’ filing, which Transparent Value made in conjunction with ETF sponsor ALPS, seeks authorisation for the following ETFs:
Transparent Value Dow Jones RBP US Large-Cap Market Index ETF
Transparent Value Dow Jones RBP US Large-Cap Aggressive Index ETF
Transparent Value Dow Jones RBP US Large-Cap Defensive Index ETF
Transparent Value Dow Jones RBP US Dividend Index ETF
Transparent Value Dow Jones RBP US Large-Cap Growth Index ETF
Transparent Value Dow Jones RBP US Large-Cap Core Index ETF
Transparent Value Dow Jones RBP US Large-Cap Value Index ETF