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Index IDEA: Concentrating on quality

Global index provider FTSE Russell recently made some adjustments to the FTSE USA Small Cap 2Qual/Vol/Yield 3% Capped Factor Index, which underlies the O’Shares FTSE Russell US Small Cap Quality Dividend ETF, to help O’Shares address investor concerns around rising interest rates and slowing growth.

The result is the new FTSE USA Small Cap ex Real Estate 2Qual/Vol/Yield 3% Capped Factor Index—it excludes real estate investment trusts (REITs), which had been a 21% allocation. This change removes REITs and reduces the number of constituent holdings from 310 to 224, increasing the weight of other growth industries in the index such as Health Care, Financials and Technology.

Based on historical data and analysis, the new index from FTSE Russell aims to enhance returns, maintain comparable volatility and lower valuation relative to its predecessor index:

Kevin O’Leary – chairman, O’Shares Investments

“Speaking with our investors and observing the direction of US equity markets, we became concerned about the impact of REITs in the O’Shares FTSE Russell US Small Cap Quality Dividend ETF. A combination of rising interest rates and slowing economic growth has impacted this area and we thought the ETF could benefit from an underlying index that was free of this asset class and more diversified in other sectors.”

Alec Young – managing director, Global Markets Research, FTSE Russell

“The art and science of index construction means having a consistent, time-tested methodology while allowing the ability to make adjustments as market conditions and client needs warrant. By making this timely adjustment for O’Shares, recognizing REITs as a separate sector, we were able to create a more concentrated index more focused on high quality companies with stable earnings and revenue growth.”

Get more information on smart beta and factor indexes from FTSE Russell.

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