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FTSE Group, a leading global index provider, has announced the launch of the FTSE Cyclical and Defensive Index Series. The new smart beta indices reflect the performance of subsets of equities based on their sensitivity to the economic cycle.
If replicated in investable format, the indices will allow investors to implement strategies according to their view on the economic cycle in different parts of the world.
The index series spans global, developed, emerging, regional and single country indices. Examples include the FTSE All-World Cyclical Index, FTSE Developed Asia Pacific Defensive Index and the FTSE UK Cyclical Index.
The cyclical indices are designed to be sensitive to the economic cycle, whilst the defensive indices are designed to be relatively insensitive.
Peter Gunthorp, Managing Director, Research & Analytics, FTSE Group said: “We are delighted to announce the launch of the FTSE Cyclical and Defensive Index Series, which aims to facilitate the analysis of market dynamics and enable the development of new investible products that expand investor choice.”
The index series uses the Industry Classification Benchmark (ICB) of sub-sectors, in order to classify sub-sectors as defensive or cyclical. While, broadly speaking, the classic well-known cyclical sub-sectors comprise the majority of constituents in the cyclical indices and vice versa, the contributions from various sub-sectors varies quite considerably across the indices based on the composition and make-up of the relevant geography’s economy and local stock market.
For example, the FTSE UK Cyclical Index is dominated by companies from sub-sectors of the Basic Materials industry, most notably General Mining firms. Individual names include Rio Tinto, BHP Billilton, Anglo America, Xstrata and Glencore. Indeed, these companies alone contribute 42.8% of the index. By contrast, the FTSE Italy Cyclical Index, for example, is dominated by companies from sub-sectors of the Consumer Goods industry. The Clothing & Accessories sub-sector provides the index’s largest constituent – Luxottica Group, the luxury sun and prescription eyewear manufacturer – with 9.8%.
Similarly, the defensive indices are comprised of classic go-to defensive sub-sectors, though again the constituents vary across geographies and markets. The FTSE UK Defensive Index, for example, is led by booze and fags companies (Diageo and British American Tobacco etc), whereas the Italian equivalent is dominated by utilities; the FTSE Developed Asia Pacific Defensive Index, by contrast, is led by pharmaceuticals.
As one would expect, the cyclical indices have higher price-to-earnings ratios (PEs) and lower dividend yields relative to their defensive counterparts. Constituents of the cyclical indices typically have lower market capitalisations, reflecting the smaller more dynamic nature of growth companies relative to the sluggish behemoths of, say, utilities, which make up a large proportion of the defensive indices.
In terms of risk, the cyclical indices have exhibited more volatility than the defensive indices over one, three and five years. However, the performance of the defensive indices over these periods has been stronger, reflecting investors’ preference for lower-risk defensive stocks during the recessionary years.
As yet, the indices are not known to have been licensed to underlie any exchange-traded funds (ETFs); however, with investors becoming increasingly interested in smart beta strategies and looking for new ways to express their views, it is likely that these indices will get noticed by ETF providers.
The full series includes:
FTSE All-World and Developed Cyclical and Defensive Indices
FTSE USA Cyclical and Defensive Indices
FTSE UK Cyclical and Defensive Indices
FTSE Asia Pacific Cyclical and Defensive Indices
FTSE Australia Cyclical and Defensive Indices
FTSE European Cyclical and Defensive Indices
FTSE Emerging Cyclical and Defensive Indices
FTSE Italy Cyclical and Defensive Indices