JP Morgan has licensed the new Stoxx Europe Sharpe Ratio 50 Index for a structured product. The new, “first-of-its-kind index family” that selects components based on their Sharpe ratios was released on February 18 by Stoxx.
The Stoxx Sharpe Ratio indices include stocks from the respective benchmarks that have the highest Sharpe ratios, while excluding those with low dividend yields and low liquidity. The index family allows investors to gain access to a diversified basket of shares that have historically the highest risk-adjusted returns, said Arnaud Jobert, managing director, head of structuring at JP Morgan. “The objective is to provide exposure to the stocks that have performed better historically, relative to the risk investors would have taken,” said Jobert. “The index echoes our smart beta offering. We have licensed the Stoxx Europe Sharpe Ratio 50 Index to be able to respond to increasing demand for smart beta underlyings.”
JPMorgan’s structured products have moved from using complex payoffs to simpler payoffs, said Jobert. “But we have also seen the actual demand for underlying innovation and more specifically for exposure to smart beta strategy indices as opposed to the traditional market cap-weighted indices,” he said.
JP Morgan is planning to launch products targeted at major European distributors either in the form of structured certificates/notes or via swaps, said Jobert. “We are looking at different alternatives to provide growth and/or income,” he said. “From a product wrapper perspective, we are not going to offer anything different but the index in itself is quite innovative within the smart beta framework.”
Demand for smart beta strategies has increased from the whole range of investors, including the major distribution networks and institutional, with asset managers, insurance companies and pension funds looking for alternatives to traditional benchmarks, said Jobert. “Risk premia has been a big theme over the last few years, but we now see this demand in the structured products market,” he said. “This used to be part of the discussion with institutional investors, but this discussion has now reached the retail market as every investor is interested in alternatives to traditional benchmarks. The scope of the market for these strategies has certainly been expanded.”
Smart beta indices offer attractive capital protection in the current low interest rates environment, said Jobert, who expects these indices to gain significant traction in the global structured products market. “These indices offer exposure to low vol and high dividend stocks, and clients seeking capital-protected exposure can buy a call option on the indices,” he said. “The appeal of these indices is that they not only offer good historical performance but also capital protection.”
The Stoxx Europe Sharpe Ratio 50 Index is based on the index provider’s Europe 600 Index and is comprised of companies that have an average six-month daily traded volume above a €1m threshold (€5m for the global version) and are among the top 20% of dividend payers. The 50 companies with the highest one-year Sharpe ratios are included in the index.
The Sharpe ratio takes into account both risk and return and this index family offers an “effective and transparent tool” to target those companies that offer some of the most attractive risk-adjusted returns, said Hartmut Graf, chief executive of Stoxx. “The Stoxx Sharpe Ratio Index family is an important addition to our smart beta offering, which includes several other indices such as Minimum Variance, Strong Quality and Strong Balance Sheet, among others,” said Graff.
All indices use Stoxx GC Pooling EUR 12 Months as the risk-free rate. The Stoxx GC Pooling Index family is based on the Eurex Repo GC Pooling Market and was designed to offer an independent alternative to unsecured interbank benchmarks such as Libor, Euribor and Eonia.
Each regional index – Europe, North America and Asia Pacific – has 50 components, while the global version has 100 components. Index components are weighted according to the inverse of their one-year volatility.
The indices are reviewed quarterly and components are subject to a 10% cap.
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