German index provider Solactive has launched a new multi-factor index composed of 50 European stocks based on the value and low volatility premiums. The Solactive Stable Income Europe Index is designed for investors looking for a value and low volatility smart beta concept that puts more emphasis on the role played by free cash flow yield.
Back-tested performance shows the Solactive Stable Income Europe Index would have returned 7.6% per annum since 2006.
The index has been built to serve as an underlying reference for index-linked investment products such as exchange-traded funds.
Specifically, free cash yields are typically used to provide an insight into a company’s financial health. Being closely related to earnings, they can give investors an indication of future shareholder dividends, the companies reinvestment plans and its ability to fulfil financial obligations.
As such, the index first applies a free cash flow yield filter which selects the top performing shares in each sector. Companies are then assigned a composite score which combines individual scores for low volatility and high dividend yield. The 50 companies with the highest composite score are then selected as index components.
Steffen Scheuble, CEO of Solactive, commented: “Nowadays many indices and financial products are constructed around high dividend yield and low volatility concepts. The Solactive Stable Income Europe adds another element into the mix by screening shares also on free cash flow yield, therefore providing an additional filter to evaluate companies’ resilience.”
The index is calculated as a price return index denominated in EUR. Constituents must have a free float market capitalization of at least EUR 200 million and a 120-day ADV of at least EUR 1 million.
The three most represented sectors in the index are finance, industrials and technology with a composite weight of 76% as of the last rebalancing day. The three countries with the highest weight are France, Germany and Switzerland reaching 66% of the index total. The largest holdings in the index are Credit Agricole (2.4%), Nexity (2.3%) and Natixis (2.3%).
According to back testing, the index would have returned 7.6% per annum since the start of 2006, with annualised volatility of 15%. The index is weighted equally and rebalanced quarterly.
ETF investors looking for a European exposure using a low volatility, high dividend yield strategy could try the PowerShares EURO STOXX High Dividend Low Volatility UCITS ETF (LON: EUHD) which has AUM of €10 million and an ongoing charge of 0.30%.