BSE, S&P index JV launches factor indices
The four measures will include non-market factors such as value, momentum, quality and volatility of stocks to assess their returns and risks
Mumbai: Indices provider Asia Index Pvt. Ltd, a joint venture between S&P Dow Jones Indices and BSE, on Monday launched four measures that will include non-market factors such as value, momentum, quality and volatility of stocks to assess their returns and risks.
While market factors such as earnings per share or price-to-earnings ratio determine the price of a stock, non-market factors play a passive yet crucial role in their performance.
The four factor indices are S&P BSE Enhanced Value Index, the S&P BSE Low Volatility index, the S&P BSE Momentum Index and the S&P BSE Quality Index. These indices will use a transparent and rule-based method to ensure reasonable liquidity of stocks.
The indices are drawn from the constituents of the S&P BSE LargeMidCap index, a sub-index of the S&P BSE AllCap index.
The small-cap stocks are excluded due to their relatively low liquidity in the pack. Each of the four indices will include top-30 companies selected on basis of their respective factor scores in accordance with the index methodology.
“The regular benchmark indices like Sensex, mid-cap and small-cap are basically market capitalisation-based, but these factor indices are trying to capture the additional risk factors that are existing in the market," Utkarsh Agrawal, senior analyst, index research & design, S&P BSE indices, said in a interview.
The S&P BSE Enhanced Value Index will measure the performance of companies with valuations based on ratios such as book value-to-price, earnings-to-price and sales-to-price, while the S&P BSE Low Volatility Index comprises companies with the least amount of volatility.
The S&P BSE Momentum Index will measure the performance of companies with highest momentum in past one year, while the S&P BSE Quality Index will track high-quality stocks based on returns on equity, accruals ratio and financial leverage ratio.
These indices will be reviewed once in six months, said Agrawal.
The maximum weight of stocks in all four factor indices is capped at 5%, and the maximum weight of BSE sectors for the S&P BSE Enhanced Value Index and the S&P BSE Quality Index is capped at 30%.
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