Portfolio Construction

STOXX was present at the annual SimCorp Global Summit, where one panel explored the latest evolution of indices, and another one presented the concept of ‘4D’ index investing — which considers a systematic portfolio’s risk, return, sustainability and trading costs.

The STOXX Focus indices build portfolios based on constituents’ geographic revenue sources rather than their country of domicile, providing a more accurate representation of regional risk at a time of rising geopolitical tensions and global trade frictions. BlackRock’s iShares has launched the first in a planned series of ETFs tracking the indices.

Timing the market is difficult, but how can we measure the degree of difficulty? A new STOXX whitepaper explores a metric — the ‘tail-implied volatility (TIV) spread’ — that can help investors understand the risk of anticipating market trends for different portfolios.

So-called buffer ETFs offer investors exposure to the market’s ups and downs, with limits on both directions — hence providing potential gains and protection. A new STOXX whitepaper explores the relative performance of a hypothetical European buffer index over the short and long term to assess its benefits and drawbacks.

Ladi Williams, Head of Thematics and Alternative Strategies at STOXX, explains in an article on ETF Stream how we have catered to the specific needs and objectives of ETF managers in devising a series of indices targeting the defense sector.

For US dollar-based investors, euro weakness has curbed returns from the record rally in European stocks. A strategy that systematically hedges against declines in the common currency, on the other hand, has significantly enhanced those returns. Two ETFs from Amundi allow investors access to said strategies.

Returns from fossil fuel stocks tend to be linked to short-term moves in energy prices. Excluding the sector can help portfolios over the long term, particularly when integrated into a broader set of ESG criteria.

The EURO STOXX 50 Volatility-Balanced index, which combines an investment in stocks with a dynamic allocation to volatility futures, jumped 8% on August 5 amid a broad equities sell-off. The volatility strategy has returned an average of 3.2 percentage points a year above its benchmark since 2006 as tail-risk protection paid off.

A portfolio’s decarbonization becomes more difficult once an emissions reduction of 60% is achieved, as high-emissions sectors become depleted. Thereafter, the portfolio construction approach — whether exclusion or optimization — will make a difference to the resulting tracking error and size of the portfolio.

The STOXX Optimal 100 indices mirror their parent indices with a smaller constituency. In controlling tracking error and active exposures through an optimization process, the new indices offer a tool for efficient hedging of benchmark portfolios.

STOXX is expanding its range of DAX indices with the introduction of UCITS- and 10%-capped indices. The alternative capped indices are tailored to asset managers who must meet strict investment thresholds.

A new study from specialists at BlackRock and STOXX explores the potential benefits of low tracking-error, multifactor portfolios. While factor investing has historically been dominated by single-factor strategies with relatively strong tilts, the authors show that diversification across multiple factors with smaller tilts and less tracking error can pay off in the long run.