The earth is flat . . . or so it was believed, until sometime after 500 B.C.1 Until then, explorers dared not venture too far, for fear of reaching the physical limits of the planet and . . . falling off. It’s easy to imagine how constrained the world must have seemed to those who held this view. Equity indexing, too, has had its own “flat earth” period, when the global opportunity set seemed to be limited to the largest stocks from a select number of large countries.
Capitalisation weighted indexes are considered to be representative of the broad market opportunity set and are characterised by high levels of liquidity, investment capacity and relatively low levels of turnover. However, concentration risks that may arise during market bubbles and the inherent factor traits of capitalisation weighted indexes have prompted alternative approaches to index construction, with the resulting indexes commonly referred to as “smart beta”. Smart beta indexes encompass both alternatively weighted and factor indexes.
Factor-based and alternatively-weighted indexes have transformed the current investment landscape. These indexes, generically called “smart beta indexes” are weighted differently than traditional market-value or capitalization-weighted indexes, providing new tools to help tailor exposures to specific risk and return objectives. For the purpose of this study we will use the term “smart beta” or “smart beta products” to refer to an investable product such as a mutual fund or ETF that closely tracks one of these indexes.
This paper describes the FTSE country classification process which is designed to be transparent and evidence-driven. External advisory committees ensure that the criteria used to determine country classification meet the needs of global investors and are judged objectively. Consistent with the Principles for Financial Benchmarks published by IOSCO in 2013, the operation of the country classification process is overseen by FTSE’s strong internal governance structure.
An investor can face a dilemma when looking for assistance in building an investment portfolio. Myriad sources offer advice, often rendering the decisions to be made difficult at best. Soldiering on with the advice and reading through literature, the investor will fairly soon come across a discussion on volatility, as reducing portfolio volatility has been a notable recent theme. Reading on, the investor will shortly realize that although sometimes considered together as “low volatility” strategies, the two most commonly-stated strategies for volatility are very different.
Many U.S. based investors seek diversification benefits by investing in international equities. Unhedged international investing however, adds foreign exchange (FX) risk in the form of an embedded currency basket, which contains long positions in foreign currencies coupled with a 100% short position in the U.S. dollar (USD).
While financial theory argues the long-term payoff to currency exposure should be zero, currency fluctuations can have a significant effect on investment returns and volatility over short and even medium-term investment time horizons.
Financial markets change continuously: markets increase and decrease in relative size, companies are listed, delisted, taken over and restructured, and securities produce cash flows. An important challenge for an index provider is to record the evolution of markets in a consistent and transparent way.
The Russell Pure Style Indexes are designed to provide focused exposure to the value and growth segments of the U.S. equity market.
The Pure Style Indexes methodology extends that of Russell’s standard Value and Growth Indexes.
While aligned with the standard style indexes, the Pure Style Indexes have increased exposures to value and growth style factors, which resulted in greater distinction in returns, in historical simulations.
FTSE Russell has today launched the FTSE China A Free Indexes** in response to demand from mainland Chinese investors for a domestic version of the FTSE China A Indexes, which will eventually be included in FTSE Russell’s global indexes.
The first quarter of 2017 saw a reversal of a year long run for value stocks which, at the end of 2016, held a 16 percentage point lead over growth stocks. A shift in style towards growth stocks—companies whose prices tend to be based on potential vs. actual earnings—in both the large cap and small cap segments of the market is often an indication of an optimistic market sentiment. The Russell 2000 style indexes help to understand the latest market movements.
Large cap China A-shares have turned the performance tables relative to mid and small cap China A-shares as measured by China A-share indexes from global index provider FTSE Russell. After declining 4.3% in the 10 year period ended June 1, 2017, the FTSE China A Large Cap Index value has risen 5.4% in 2017. The FTSE China A Mid Cap Index and FTSE China A Small Cap Index values, on the other hand, have both declined in 2017 after rising 30.3% and 61.7%, respectively, over the last decade.
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