European index provider Stoxx has launched a suite of multi-asset indices, built around its flagship Euro Stoxx 50 stock universe, that dynamically shift allocations to equities and corporate bonds based on momentum signals while simultaneously maintaining risk at pre-defined maximum volatility levels.

Matteo Andreetto, Chief Executive Officer, Stoxx.

The Euro Stoxx 50  Multi-Asset Momentum Risk Cap Indices combine the performance of two components – the Euro Stoxx 50 Index, an equity index, and the Euro Stoxx 50 Corporate Bonds Index (see Stoxx launches fixed income equivalent of Euro Stoxx 50).

The allocation between these two underlying indices is based on a combination of a momentum strategy and a cap on volatility. In order to account for differences in investors’ risk preferences, indices with volatility caps of 5%, 7.5%, 10%, 15% and 20% are available.

The indices are screened for high liquidity and therefore suited as underlying references for financial products such as exchange-traded funds (ETFs) or structured products.

Commenting on the launch, Matteo Andreetto, Chief Executive Officer, Stoxx, said: “Research shows that demand for multi-asset strategies has grown in recent years as has the need for innovative solutions. To meet this need, Stoxx expands its range of multi-asset indices with the launch of the Euro Stoxx 50 Multi-Asset Momentum Risk Cap Indices.”

The Euro Stoxx 50 Index represents the equity performance of 50 supersector leaders in the 12 eurozone countries, capturing approximately 60% of the free-float market cap of the Euro Stoxx TMI Index. The index is weighted by free-float market cap, and each component’s weight is capped at 10% of the index’s total free-float market cap.

The Euro Stoxx 50 Corporate Bond Index tracks the performance of euro-denominated, investment-grade corporate debt of Euro Stoxx 50 companies. Constituents are weighted according to the market capitalisations of bond issuance with issuer and sector caps of 20% and 40% respectively.

“Our multi-asset strategies are designed for market participants who want to benefit from the cross-asset exposure to core equities and fixed income within the Euro Stoxx 50 universe,” added Andreetto. “The dynamic allocation strategy of the newly launched versions potentially increases performance, while simultaneously being sensitive to risk. This combination allows to construct efficient portfolios in accordance with individual risk preferences.”

According to Ruben Feldman , Director Business Development, Stoxx, minimum variance portfolios are now seen as ‘delivering the “best of all worlds”: low risk, low drawdowns and strong returns.’

Feldman said: “With the focus on reduction of risk, it is natural to assume that there is a return trade off; however there is much academic research and increasing empirical evidence that a minimum variance portfolio provides strong historical total returns and Sharpe ratios.”

According to Dr. Jan-Carl Plagge, Head of Applied Research at Stoxx: “The empirical analysis indicates that a binary momentum strategy based on the Euro Stoxx 50 and the Euro Stoxx 50 Corporate Bonds Index delivers superior performance results over the time period analyzed, outperforming single index investments into either the Euro Stoxx 50 and the Euro Stoxx 50 Corporate Bonds Index.

“The combination of momentum with a risk ceiling enables investors to profit from the performance-increasing effect stemming from the momentum factor while simultaneously being sensitive to risk. The offering of various risk caps allows investors to find their individually preferable trade-off between risk and return. However, additional return is found to come for the price of additional risk. Thus, the lower the risk ceiling, the lower the expected return.”

The indices are rebalanced on a quarterly basis at the last trading day of March, June, September and December. At any other calculation day, a daily volatility level control procedure is applied.

In May, Stoxx introduced a more basic range of multi-asset indices which combined the same two indices, with fixed allocations (see Stoxx launches multi-asset indices for ETFs).