Russell Indexes introduces high-efficiency defensive indices

Feb 6th, 2013 | By | Category: ETF and Index News

Russell Indexes has introduced a new series of smart beta, low-volatility indices that expand on the provider’s current defensive index range. The new Russell High Efficiency Defensive Indexes combine various economic and market risk factors, creating a “stability score”, to identify high-quality, low-volatility stocks.

Russell Indexes introduces high-efficiency defensive indices

Rolf Agather, managing director of global research and innovation at Russell Indexes.

The indices, which are based on existing index universes, are the first low-volatility benchmarks to offer low targeted tracking error to widely-followed Russell benchmarks.

In contrast to Russell’s standard defensive indices, the Russell Defensive Indexes, where constituents are selected on the basis of stability but then weighted by market capitalisation, the weightings of stocks within the new “high efficiency” defensive indices are determined in direct proportion to their stability score.

Russell generates a stock’s “stability score” based on a combination of quality and price volatility characteristics. Quality seeks to measure a variety of fundamental risks that a company may be exposed to, such as those related to balance sheet leverage, economic cycles, industry/product cycles and the durability of its business model. The variables used to proxy these risks are debt-to-equity ratio, earnings variability, and return on assets.

The price volatility characteristics of companies are measured by 52-week total return volatility and 60-month total return volatility. The price volatility variables capture the market’s overall assessment of a company’s stability, including risks such as litigation risk and regulatory risk, which may not be fully captured by accounting-based quality variables.

The indices have been developed in collaboration with Westpeak Global Advisors, an independent US-based research firm specialising in factor-based investing. In the case of these indices, the targeted factor is stability.

Rolf Agather, Managing Director of global research and innovation at Russell Indexes, said: “Since their introduction in 2011, the Russell Defensive Indexes have appealed to investors who want to identify stocks on the basis of economic stability measures. By building on this concept, the Russell High Efficiency Defensive Indexes provide an additional option for investors interested in the Defensive Index methodology but seeking a more direct link between a company’s stability factor and its weight within the portfolio and a lower tracking error relative to current low volatility indexes.”

Kal Ghayur, Managing Partner and Chief Investment Officer at Westpeak Global Advisors, said: “Westpeak designs strategies that seek an information-efficient capture of common factor returns at targeted levels of tracking error and with reduced turnover. We are pleased to join forces with Russell Indexes to bring this index innovation to investors looking for additional ways to implement low-volatility investment strategies at desired levels of tracking error.”

The new series initially consists of 22 separate indices, rebalanced quarterly. The indices have been designed and structured so as to be suitable as underlying benchmarks for index-linked investment products such as exchange-traded funds (ETFs).

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