Stoxx launches new series of European sector indexes with Source

By Devika Patel

Knoxville, Tenn., July 14 - Stoxx Ltd. announced it has launched the Dow Jones Stoxx 600 Optimised Supersector indexes, a new series of European sector indexes developed in collaboration with Source.

Key factors addressed in the construction of the new equity indexes are concentration, diversification, liquidity and availability to borrow stocks in the index. Source has licensed 18 of the 19 sectors as index benchmarks for exchange-traded funds, which will be launched in the coming weeks.

Stoxx said one of the defining features of the indexes is that they will be the first to take into account the ability to borrow a stock in the stock lending market, a key component in facilitating active trading in the underlying index constituents and related products.

To incorporate this aspect, Stoxx uses data provided by Data Explorers, an independent provider of stock lending and short interest information.

The initial index universe for the new indexes is the stocks in the Dow Jones Stoxx 600 index. Stocks from Iceland and Greece are then removed. The remaining stocks are ranked by two liquidity measures: average daily turnover value to market free float and availability to borrow. Availability to borrow data is provided by Data Explorers.

Up to 60 stocks with the lowest liquidity are removed from the index. The remaining stocks are then divided into the 19 supersectors based on their industry classification benchmark. Each sector is then optimized using Stoxx's approach to single-stock weighting.

This approach applies a sector-dependent liquidity factor against the float-adjusted market capitalization weight of each remaining stock in the supersector, reducing the weight of those with high average daily turnover value ratios while preserving the weight of those components that are more liquid.

Finally, the largest stocks in each supersector are capped at between 10% and 20% depending on the number of stocks in that sector.

The stocks are categorized into the following 19 supersectors: automobiles and parts, banks, basic resources, chemicals, construction and materials, financial services, food and beverage, health care, industrial goods and services, insurance, media, oil and gas, personal and household goods, real estate, retail, technology, telecommunications, travel and leisure and utilities.

The Dow Jones Stoxx 600 Optimised Supersector indexes are available in price and total return versions and are reviewed quarterly in March, June, September and December. The indexes are weighted by float-adjusted market capitalization and are calculated in euros and dollars.

The indexes cover 16 European countries: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy, Luxemburg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

"With the launch of the Dow Jones Stoxx 600 Optimised Supersector indexes we are taking an innovative approach to creating sector index products by focusing even more on improved liquidity and diversification," Stoxx chief executive officer Ricardo Manrique said in a press release. "The even greater degree of underlying liquidity is achieved by concepts such as applying a special liquidity weighting factor to each component and incorporating a stock's availability to be borrowed. In addition, a new component weighting cap scheme assures UCITS-III compliance."

Stoxx provides European equity indexes and is based in Zurich.

Source is a specialist provider of exchange-traded products that was founded earlier this year by Bank of America Merrill Lynch, Goldman Sachs and Morgan Stanley.

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