This research paper provides a review of the investment rationale behind the concept of revenue exposure indices, in which the indices’ constituents are disentangled according to the sources of revenues.

As globalization across regions and industry sectors rapidly progresses, companies selected into standard equity indices are often found to have a geographically diverse revenue base. As a result, an investment in a given market index provides exposure not only to the targeted country or region but also to foreign regions and the risk factors thereof.

STOXX has developed a new index family called STOXX True Exposure™ or STOXX TRU™. Other than traditional regional equity indices, STOXX TRU™ indices explicitly take into account the geographic source of revenue generation for each company selected into the indices. These indices aim to address the “home bias” in asset allocation practices, with a view to boosting portfolio returns in given market conditions. In fact, as uncorrelated drivers become prominent in portfolio construction diversification, pure-play country revenue-exposed indices might insulate to some extent global portfolios from major dislocation factors originating either in countries or regions other than the core exposure of the indices.

Determining the economic exposure of companies represents a new factor in the construction of diversified equity portfolios that could well serve as an alternative metric to the traditional country factor definition.

A wide body of academic literature has analyzed the relationship between economic exposure to country and regional risks and company valuations as well as the impact on stock performance. Nonetheless, the cost exposures across countries have not been investigated thoroughly to assess in full the fundamental exposure at the company level. That determination is left for future research and appears to be promising.

Read: STOXX True Exposure™ Indices - An Alternative Metric To The Traditional Country Factor Definition