Stoxx, a leading European provider of equity indices, has announced the launch of the Stoxx True Exposure Index family, which are designed to track regional and country exposures more intuitively.
The new Stoxx indices group constituents by geographic source of revenue.
The indices provide a targeted approach to country and region allocation by selecting constituents based on where their revenue is generated. This differs from traditional indices which aggregate constituents based on country of domicile or primary listing, an approach which overlooks the underlying drivers of return and pays little attention to revenue overlap across geographies.
The Stoxx indices offer a more distinct method of aggregating holdings, which should lead to reduced correlations across indices and provide investors with an improved tool for asset allocation.
The indices are available in revenue exposures ranging from 25% to 100%, with each range setting the minimum required revenue for a constituent to be included in the index. This classification allows investors to find the suitable balance between exposure to the target region, market-cap coverage of industry and country allocations.
Components for the indices are selected from the parent Stoxx indices based on the minimum required revenue exposure (25%, 50%, 75%, 100%) of each index. They are then weighted by a combination of market capitalisation and their revenue exposure to local market. For companies that do not disclose revenue breakdown on a country level, Stoxx applies a unique export-based methodology to estimate revenue exposures.
Hartmut Graf, chief executive officer of Stoxx, commented: “In today’s interconnected world, having a portfolio that invests in a US, European and Asian market-cap benchmark leads to unintended regional overlaps of economic exposures, leaving investors with allegedly diversified portfolios that could have highly correlated returns.”
He added: “Our Stoxx True Exposure Indices help investors create an asset allocation based on truly separated geographic buckets. These buckets are significantly less correlated among each other compared with standard equity indices, resulting in an improved risk profile. The Stoxx True Exposure Indices are based on a sophisticated and innovative model to identify a company’s economic exposure to a country or region, when a such a breakdown is not available explicitly.”
The indices will rival similar index suites such as the MSCI Economic Exposure Indices and the Russell GeoExposure range.
The initial offering is composed of five country indices (Australia, Canada, Japan, UK and USA), four regional indices (Eurozone, Europe, Asia/Pacific and North America) and four global indices (Developed Markets, Developed Markets ex Europe, Developed Markets ex USA and Emerging Markets).