{"id":38969,"date":"2023-07-22T03:19:43","date_gmt":"2023-07-22T07:19:43","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/introducing-the-sp-smallcap-600-qvml-top-90-multi-factor-index\/"},"modified":"2023-07-22T03:19:46","modified_gmt":"2023-07-22T07:19:46","slug":"introducing-the-sp-smallcap-600-qvml-top-90-multi-factor-index","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=38969","title":{"rendered":"Introducing The S&P SmallCap 600 QVML Top 90% Multi-Factor Index"},"content":{"rendered":"
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<\/picture>
<\/figcaption><\/figure>\n<\/p>\n

By Wenli Bill Hao <\/em><\/p>\n

For market participants seeking to measure small-cap, multi-factor equity premia with greater diversification and historically lower tracking error (TE), S&P DJI has recently launched the S&P SmallCap 600\u00ae<\/sup> Quality, Value, Momentum and Low Volatility (QVML) Top 90% Multi-Factor Index.<\/span><\/p>\n

In this blog, we will examine the index construction methodology, historic performance, sector composition and factor exposure.<\/p>\n

Methodology Overview<\/strong><\/h2>\n

The S&P SmallCap 600 QVML Top 90% Multi-Factor Index uses a systematic bottom-up approach<\/strong> to select the top 90% stocks, ranked by their multi-factor scores, from the S&P SmallCap 600\u00ae<\/sup> universe. Moreover, the constituents are weighted by floated-adjusted market cap (FMC) and rebalanced quarterly. Here, the multi-factor score is defined as the average<\/strong> of the underlying quality, value, momentum and low volatility Z-scores.1<\/sup> In essence, the index excludes the bottom 10% lowest-ranked constituents<\/span><\/strong> based on their multi-factor scores.<\/span><\/p>\n

Empirical back-tested analysis shows that, in the S&P SmallCap 600 universe, the lowest-ranked decile exhibited the lowest performance over the period tested. Hence, T90%, which removes the lowest-ranked decile, would have outperformed the S&P SmallCap 600. Here, stocks have been ranked by their multi-factor score and grouped into deciles (D1 = the highest ranked, D10 = the lowest-ranked), as shown in Exhibit 1.<\/p>\n

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\"Cap-weighted <\/picture>
<\/figcaption><\/figure>\n<\/p>\n

The S&P SmallCap 600 QVML Top 90% Multi-Factor Index was designed to have high diversification and low TE to its benchmark. The slopes of the lines in Exhibit 2 represent the information ratios (IR; defined as the ratio of annualized excess return divided by annualized TE) for a series of indices, each differentiated by the number of deciles removed. For example, T90% removes only the lowest-ranked decile (ranked by multi-factor score), T80% removes the two lowest-ranked deciles (i.e., the 20% lowest-ranked stocks) and so on.<\/p>\n

As shown in Exhibit 2, T90% had the highest IR. As more deciles were removed from the back-tested results, their IRs became lower, which means the excess risk (TE) was not proportionally compensated by the excess return.<\/p>\n

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\"Declining <\/picture>
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Performance Comparison<\/strong><\/h2>\n

Historically, the S&P SmallCap 600 QVML Top 90% Multi-Factor Index outperformed its benchmark for all periods studied, in both the long and short term, and in terms of both total returns<\/strong> and risk-adjusted returns <\/strong>(see Exhibit 3). The empirical results show that multi-factor premia do exist over the long-term horizon.<\/p>\n

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\"Performance <\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Tracking Error and Information Ratio<\/strong><\/h2>\n

Given the index design, the S&P SmallCap 600 QVML Top 90% Multi-Factor Index had a low TE over time, based on daily total return calculation (see Exhibit 4). Through targeted multi-factor exposure, the strategy generated excess return and had a positive IR for all periods studied, in both the short and long term.<\/p>\n

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\"Tracking <\/picture>
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Sector Composition<\/strong><\/h2>\n

Exhibit 5 shows the historic sector exposures of the S&P SmallCap 600 QVML Top 90% Multi-Factor Index and the S&P 600. The small sector exposure differences (less than 1%) for all sectors show that the strategy has retained the core characteristics of its benchmark historically.<\/p>\n

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\"Sector <\/picture>
<\/figcaption><\/figure>\n<\/p>\n

Factor Exposure<\/strong><\/h2>\n

Exhibit 6 illustrates the factor exposure difference of the S&P SmallCap 600 QVML Top 90% Multi-Factor Index versus the S&P 600, as measured through the lens of the Axioma Risk Model Factor Z-scores. The strategy had higher exposures to quality<\/strong> (higher profitability and lower leverage ratio), value<\/strong> (higher earnings yield and the book-to-price ratio) and momentum<\/strong>, while it had lower volatility<\/strong> (lower beta and volatility). The findings are in line with the index design, which selects the top 90% stocks in terms of their multi-factor scores.<\/p>\n

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\"Factor <\/picture>
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1<\/sup> Please refer to the S&P QVML Multi-Factor Indices Methodology for more details.<\/p>\n

Disclosure: Copyright \u00a9 2023 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. This material is reproduced with the prior written consent of S&P DJI. For more information on S&P DJI please visit www.spdji.com. For full terms of use and disclosures, please visit www.spdji.com\/terms-of-use.<\/p>\n

Original Post<\/p>\n

Editor’s Note:<\/strong> The summary bullets for this article were chosen by Seeking Alpha editors.<\/p>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By Wenli Bill Hao For market participants seeking to measure small-cap, multi-factor equity premia with greater diversification and historically lower tracking error (TE), S&P DJI has recently launched the S&P SmallCap 600\u00ae Quality, Value, Momentum and Low Volatility (QVML) Top 90% Multi-Factor Index. In this blog, we will examine the index construction methodology, historic performance, […]<\/p>\n","protected":false},"author":1,"featured_media":38970,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"gallery","meta":{"footnotes":""},"categories":[236],"tags":[83],"class_list":["post-38969","post","type-post","status-publish","format-gallery","has-post-thumbnail","hentry","category-news","tag-featured","post_format-post-format-gallery"],"yoast_head":"\nIntroducing The S&P SmallCap 600 QVML Top 90% Multi-Factor Index | iFintechWorld<\/title>\n<meta name=\"description\" content=\"By Wenli Bill Hao For market participants seeking to measure small-cap, multi-factor equity premia with greater diversification and historically lower\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/ifintechworld.com\/?p=38969\" \/>\n<meta property=\"og:locale\" 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