Nikkei has announced plans to roll out a new mid- and small-cap index to track Japanese companies that produce the best return on equity and operating profit. The new index will be modelled after the JPX-Nikkei 400; it will have about 200 constituents and Nikkei plans to launch it by the end of March.
The JPX-Nikkei 400 selects its components based on an aggregate score, with 40% of the score's weight derived from the stocks' three-year cumulative return on equity (ROE) and three-year cumulative operating profit each, and 20% from the market cap. The index generated a return of 9.27% in 2015, which compares with 9.07% for the Nikkei 225 and 9.93% for the Topix. The gauge is followed by 37 exchange traded funds (ETFs). The SRP database contains 120 products with the JPX-Nikkei 400 as an underlying, including 17 offers so far in 2016.
The new benchmark, tentatively named JPX-Nikkei Mid and Small Cap Index, aims to meet the demand for capital efficiency and investor-oriented corporate management, Nikkei and JPX said in a joint statement.
"We'll decide the detail of the new index methodology from now on and plan to announce the list of constituents and methodology by the end of 2016," said a Nikkei spokesperson. "The calculation of the new index is scheduled to commence calculation in March 2017."
The JPX-Nikkei 400 and the new index do not fit all definitions of smart beta, and Nikkei and JPX Group do not classify either gauge as smart beta, said the spokesperson, adding that "we recognise that return on equity or operating profit is one of the major financial indicators".
Corporate governance has been a hot topic in Japan. The Bank of Japan made the issue one of the foundations of its efforts to push for structural change in light of economic difficulties in recent years. BoJ announced that it plans on purchasing up to ¥6tn (US$59bn) worth of ETF shares per year from ETFs that pick out companies exhibiting positive corporate governance practices.
Nikkei and JPX acknowledge BoJ purchases the ETFs of JPX-Nikkei 400 as a part of QQE, but would not speculate on the treatment of the new index, said the spokesperson. "We hope the new index will be utilised by varieties of users including asset management companies," said the spokesperson. Liquidity will be considered when selecting issues in order to facilitate the use of the new index for asset management, said the spokesperson.
'With ETFs listed on markets across the world since index launch, the JPX-Nikkei Index 400 has been widely accepted by investors at home and abroad, and is used for fund management by publicly offered investment trusts and pension funds,' the two companies said last week. 'We believe that the new index will similarly lead to the further development and vitalization of Japan's securities market.'
Separately, Nikkei also plans in December to begin publication of a new benchmark - the Nikkei Asia300 Index, based on the existing Asia300 list of 'must-watch' Asian companies maintained by Nikkei.
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