UBS has launched on the SIX Structured Products Exchange UBS Open End PERLES (EQLCH), a new tracker certificate linked to the Solactive Swiss Equal-Weight Net Total Return Index.
The index was developed between the bank and Solactive AG and was designed to represent the performance of large capitalisation stocks in Switzerland and based on an equal-weight approach.
In the case of conventional weighting by market capitalization, the proportion of an equity increases as soon as it gains value, and vice versa - Dominik Gottet
There has been a growing trend over the past few years in the indexing space towards smart beta, including equal-weight indices, which are seen as a good solution to have a better representation and more diversified approach of an entire industry or national market. According to UBS CIO WM Research, investing with an equal-weight approach has shown to exhibit attractive long-run risk and return properties.
The UBS Open End PERLES certificate on the Solactive Swiss Equal-Weight Index will provide investors with the possibility to invest in Switzerland's largest 20 companies in a diversified way. An equal weighting prevents a concentration risk and furthermore circumvents the so-called "buy high, sell low" effect, said Dominik Gottet, equity derivatives expert at UBS.
“In the case of conventional weighting by market capitalization, the proportion of an equity increases as soon as it gains value, and vice versa,” said Gottet. “As a result, the buyers of such indices rely on the winners of the past. Back-tested historical data of the index shows an outperformance against the capitalization-weighted SMI by 0.9% p.a., with a return of 8.25%p.a., a volatility 18.9%p.a. and a Sharpe Ratio of 0.44 (Gross Total Return, between 01st January 2005 and 10th July 2015).”
Steffen Scheuble, CEO at Solactive said the new index offers a new approach to a well-known market. “We are pleased to fill in another gap in the market for UBS, with the launch of this equal-weight index following the Swiss market via its top 20 blue chips,” he said.
The index, said Gottet, has back-tested and the results are positive. “Smart beta is a buzzword that is increasingly popular among investors," said Gottet. "This strategy blurs the boundaries between active asset allocation and passive positioning in a particular benchmark. Unlike conventional indices that are usually weighted by market capitalization, smart beta strategies use fundamentals. Equal-weight investing represents one smart beta strategy which according to UBS CIO WM Research has shown to exhibit attractive long-run risk and return properties.”
Index trackers have been used in the past to test new strategies which can afterwards attract demand for other type of structures, said Gottet. “UBS has a strong track record as a provider of efficient investment solutions that open up new markets and strategies for investors," said Gottet. "We therefore consider applying this equal-weight approach for other markets in the near future."