FTSE Group, the index provider to some of the largest U.S.-listed exchange traded funds, today introduced the FTSE Global Factor Index Series, a suite of factor-based global indices.
Six single factor indices will be created as part of the index series: Illiquidity, Momentum, Quality, Size, Value and Volatility. They will be based on the market cap weighted FTSE Developed and FTSE Emerging indices, according to a statement issued by FTSE.
The FTSE Emerging Markets Index serves as the benchmark for the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO), the largest emerging markets ETF by assets.
The initial indices “will consist of six single factor indices representing a tilt in a specific direction (e.g. low volatility, small size). Indices exhibiting multiple factor tilts and directions will form part of the offering,” said FTSE.
Looking at the value factor, FTSE assesses earnings yield, price-to-book ratio, cash flow yield, price-to-sale ratio and dividend yield in an effort to capture the value premium, noting that the premium is “economically significant using both absolute and relative measures of value.”
In addition to the value factor, the quality factor is one of the most applied factors to alternatively-weighted indices and ETFs. And like the value factor, there has been debate surrounding the strict definition of exactly what the quality factor is and its objectives.
However, FTSE employs a practical application of the quality factor with a focus on return on assets (ROA) and change in asset turnover (ATO).
“We find that historically companies with high current levels of ROA and larger changes in ATO have displayed superior subsequent operating performance. Historically, quality companies identified using these measures have outperformed those with lower levels of ROA and smaller changes in ATO. Highly profitable companies that display improvements in operating efficiency also exhibit lower levels of volatility and systematic risk,” said FTSE in a white paper on the quality factor.
The quality factor has become an increasingly popular point of emphasis for index providers and ETF sponsors. There are close to 25 ETFs emphasizing the quality factor currently trading in the U.S. [Quality ETFs on the Rise]
Over 100 U.S.-listed ETFs track FTSE indices. In addition to VWO, that group includes the iShares China Large-Cap ETF (NYSEArca: FXI), the Schwab Emerging Markets Equity ETF (NYSEArca: SCHE) and the Schwab International Small-Cap Equity ETF (NYSEArca: SCHC), among others.
ETF Trends editorial team contributed to this post.