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STOXX expands SP Offering with Select and Diversification Select

STOXX expands SP Offering with Select and Diversification Select

Jan. 14, 2016

Jan. 14, 2016

Institutional investors’ demand for tailored products, such as structured notes, continues to grow. STOXX, the global leading index provider in the structured products space, provides customized indices for clients across different asset classes. In October 2015, we introduced the STOXX Select and STOXX Diversification Select index families to enable investors to participate in the performance of stocks with high yields and low price fluctuations–additionally applying a low correlation screening for the latter.

Suite of smart-beta indices

The STOXX Select and STOXX Diversification Select index families are derived from major STOXX benchmarks. The STOXX Select Indices measure the performance of companies with low volatility and high dividend yields. To benefit from the low-volatility anomaly and avoid selecting stocks whose dividend yield is high as a consequence of a share price drop, a step-by-step approach is applied: First high volatility is excluded, then top dividend payers are selected. The STOXX Diversification Select Indices add an extra layer that reduces the probability to select highly correlated stocks. This helps avoid a common problem for investors seeking diversified risk exposure, as stocks with similar characteristics tend to perform in line. Low volatility and high dividend screenings usually tilt the composition to specific sectors or regions. By adding the low correlation screening, the risk is reduced and a stronger exposure to the target stocks is achieved. Components of both index families are weighted by the inverse of their volatility.

Attractive Pricing Framework

The near-zero-interest-rate environment in many large developed economies has accentuated the need to achieve the best possible pricing in structured products, which are baskets of different assets arranged to fit the expectation or need of a client. Normally, structured products are composed of a zero-coupon bond (a note that is issued at a deep discount to its face value but pays no interest) plus one or several options. The zero-coupon bond will be redeemed at face value at maturity, hence guaranteeing part of, or the total initial capital. The call will provide the extra return should the underlying perform by the time of expiration.

The price of the derivative is of outmost importance: the cheaper it is, the more the exposure the investor gets to his or her bet, and the larger the return if things go as planned. As Alexandre Ruggeri, product developer at STOXX, points out, an option on, for example, the EURO STOXX® Diversification Select 50 Index is likely to be cheaper than one on the EURO STOXX 50® Index, because of the characteristic of the new index. “At STOXX we can invest on bringing the cost of these options down,’’ says Ruggeri. “We do this by exploiting volatility and dividend. If we get low volatility and high dividend yield, the price of the option is going to be cheaper.’’ An added benefit comes from the historical returns of low volatility/high dividend stocks, Ruggeri says, which have outperformed in long periods due to their more stable businesses and smaller potential drawdowns. The STOXX Select and STOXX Diversification Select index families consist of more than 40 indices that are based on traditional STOXX benchmarks, covering various countries and regions, as well as investment styles and strategies such as the STOXX True Exposure™ Indices and the STOXX Global ESG Leaders benchmarks for sustainability.

Today’s often turbulent market environment, and ever more sophisticated financial tools, means the focus and needs of investors (such as capital preservation and outperformance) are constantly changing and the need for resistant products increases. The STOXX Select and STOXX Select Diversification Indices provide a new standardized, transparent and rules-based investment solution that can help improve both risk and return factors.

 

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