Nikko Asset Management has launched an exchange-traded fund offering exposure to a customised MSCI index tracking highly liquid Japanese firms that provide significant dividend levels. Furthermore, the index weightings have been optimised to provide the lowest possible volatility exposure while maintaining suitable diversification. The Listed Index MSCI Japan Equity High Dividend Low Volatility ETF has been listed on the Tokyo Stock Exchange.

Nikko Asset Management’s newly launched ETF applies several layers of smart-beta application within its methodology. This includes screening stocks for high liquidity and high dividends, and applying optimisation techniques to reduce volatility.

“With the rapid growth of the Japanese ETF market, institutional and retail investor requirements are now more sophisticated. We are focusing on the growing demand for funds that offer high dividends with low volatility,” said Hideo Abe, executive vice chairman of Nikko Asset Management. “This ETF clearly differentiates itself from other Japanese equity index funds that track the TOPIX or Nikkei 225, or existing high-dividend ETFs. From the perspective of both convenience and fund-management performance, we are confident it will deliver added value for investors.”

The ETF tracks the performance of the MSCI Japan IMI Custom Liquidity and Yield Low Volatility Index which is derived from its parent index, the MSCI Japan Investable Market Index. The index excludes all firms operating in the financials sector as well as real estate investment trusts. The methodology behind the index involves a three-step process whereby all eligible securities are first ranked in descending order according to their 1-month annualised trading volumes and the top 400 firms are selected. In the second step, all remaining securities are ranked in descending order according to their dividend yield and the top 150 securities are selected.

In the final step, the index weightings are optimised to target the lowest possible volatility of the remaining securities. The process here involves applying MSCI’s proprietary methodology as used in the MSCI Global Minimum Volatility Indices. Within this step, minimum and maximum constituent weights of 0.05-1.00% are applied to ensure the final index remains diversified.