Taipei-based asset manager Shin Kong Investment Trust has launched a new ETF in Taiwan providing exposure to a US sector rotational strategy developed jointly by Barclays and Nobel Prize-winning economist Professor Robert Shiller.

Professor Robert Shiller. 

The Shin Kong Shiller Barclays CAPE US Sector Value ETF (00866 TT) has listed on the Taiwan Stock Exchange and comes with an expense ratio of 0.55%.

The fund tracks the Shiller Barclays CAPE US Sector Value Net TR Index which also serves as the underlying for the $2.0 billion Ossiam Shiller Barclays CAPE US Sector Value TR ETF (USCP GY) listed in Europe.

The index uses the cyclically adjusted price-to-earnings (CAPE) ratio to determine relative valuation.

The ratio is calculated by dividing the current market value of a group of companies’ shares by their average, inflation-adjusted earnings over ten years. By comparing this figure to historical averages of other groups, the ratio provides insight into how the companies are relatively valued.

For the purposes of the ETF, the index methodology deploys the CAPE ratio to measure the relative value of equity sectors. The ratio compares the current value of companies in a sector to inflation-adjusted aggregate earnings of the sector averaged over ten years to remove the effects of business cycles.

The methodology attempts to identify those sectors which are undervalued, which are overweighted in the index, and avoid those sectors which are overvalued, which in turn are underweighted.

A common concern with this approach (and value investing in general) is that there is a risk that some undervalued companies are destined to remain undervalued, or perhaps even depreciate further if the underlying fundamentals of the business deteriorate.

In a bit to avoid these companies, the index applies a momentum filter to identify those which appear to be rising in value. The output of this methodology should be a portfolio with a value bias that aims to pick the right sectors at the right point in time.

The methodology analyses ten S&P US Select Sector indices, each representing a specific GICS-defined sector of the US economy: communication services, consumer discretionary, consumer staples, energy, financials, healthcare, industrials, information technology, materials, and utilities.

The five sectors with the lowest relative CAPE ratios are identified. The sector with the lowest 12-month price momentum is removed. The remaining four sector indices are equally weighted to form the final index.

Index reconstitution and rebalancing occur semi-annually.