As the exchange traded fund industry quickly expands, indexers are engineering new ways for fund sponsors to deliver market strategies to investors and financial advisors.
For example, MSCI Inc. (NYSE: MSCI), a leading provider of many ETF benchmark indices, recently launched the MSCI ACWI Momentum Index and the MSCI USA Momentum Index, part of the growing family of MSCI Risk Premia Indices, according to a press release. The indexer also plans to extend the line of indices later this year.
The indices will follow a type of equity momentum strategy comprised of stocks with high price performance over the past 12 months. Additionally, the indices aim to limit drawdowns during periods of extreme volatility.
“Numerous academic studies suggest that portfolios tilted towards stocks with high momentum have outperformed market cap weighted indices over the long run,” according to a MSCI research note. “Momentum strategies tend to outperform in upward trending markets, making them good complements to value or low volatility strategies.”
While the momentum strategy may incur high turnovers, the index provider tries to offer reasonable turnover levels.
“Momentum strategies require frequent rebalancing leading to high turnover and may suffer sharp drawdowns in periods of market turmoil,” Dimitris Melas, Managing Director and Head of New Product Research at MSCI, said in the press release. “The MSCI Momentum Indices address these challenges by incorporating innovative features such as risk-adjusted return calculations and ad-hoc rebalancing triggered by spikes in market volatility. These aim to ensure that the indices capture momentum risk premia with reasonable turnover and moderate drawdowns during periods of high market volatility.”
BlackRock has already tapped the MSCI USA Momentum Index for an iShares fund offering.
For more information on indexing, visit our indexing category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.