The twelve benchmarks within the FTSE Global Factor Index Series, are designed to represent the performance of six specific factors: illiquidity, momentum, quality, size and volatility across both emerging and developed markets.
While quick to differentiate the offering from the flood of smart beta products entering the market, the timing of the launch means it coincides well with an increase in both interest and demand for new ways to improve the flexibility with which one can invest, evidenced by the growth in flows into smart beta products.
According to the index provider, the six factors selected represent common factor characteristics for which there is a “broad academic and practitioner consensus, supported by a body of empirical evidence across different geographies and time periods”.
The six factors, defined below, will initially be available in a specific ‘tilt’ either high or low, while it says subsequent launch phases will expand the offering to include: “A wider geographic span of indices, Indices exhibiting multiple factor tilts and tilts in the opposite direction and the application of factor tilts to non-market capitalisation-weighted indices”.
Peter Gunthorp, managing director for research & analytics at FTSE said the new series will allow investors “the granularity and consistency that they require when developing benchmarking tools and results in a mechanism for the creation of index tracking funds and derivatives”.
The six factors are defined by FTSE as follows:
- Liquidity: Amihud ratio – median ratio of absolute daily return to daily traded value over the previous year
- Momentum: residual Sharpe ratio
- Quality: composite of profitability (return on assets), efficiency (change in asset turnover), earnings quality (accruals) & leverage
- Size: full market capitalization
- Value: composite of trailing cash-flow yield, earnings yield and country relative sales to price ratio
- Volatility: standard deviation of 5 years of weekly (wed/wed) local total returns
