Continue active refreshing of this index's data?

Continue active refreshing of this index's data?

Equity Risk Monitors — August 8, 2023

Equity Risk Monitor Highlights | Week Ended August 4, 2023

We are pleased to announce the introduction of the new STOXX® World Equity family of indices to our risk monitors, together with a small revamp of our landing page.

The STOXX World Equity Indices are market-capitalization weighted indices that track the performance of developed and emerging markets stocks across the capitalization spectrum. They are built to be representative and tradeable, transparent and consistent across markets, and are modular in design and use. See here for more information on the new suite.

For the risk monitors, we have chosen members of the index family for the regions we currently cover. With the exception of US small cap, the risk monitor indices include large and mid-cap names, what we consider to be the ‘core’ indices for each region. We will continue to offer our risk monitors using the original fixed-number-of-names versions as well, although our future commentary will likely focus on the new indices. The most notable difference is between the original and new STOXX World Emerging Markets indices, and this is the result of various index construction decisions. Whereas the existing indices were well fit for purpose, and many readers use them regularly, we also want to highlight the new indices which enable to slice and dice desired indices for a more tailored, user friendly approach.

In most cases, the differences between the original index and the corresponding STOXX World Equity index are quite small, with tracking error[1] of less than 1% between them. The table below highlights the tracking error between the original and STOXX World Equity indices and details the biggest contributors to the difference.

The most notable difference is between the original and new STOXX World Emerging Markets indices, and this is the result of various index construction decisions. For instance, the STOXX Emerging 1500 index did not include China A and P shares, while the new index does. In addition, there are certain country allocations that also lead to differences, along with foreign restrictions that are placed on the STOXX World Equity indices.

The STOXX World Equity indices have fewer constituents than their original-index counterparts, which means that for most, specific risk accounted for a lot of the tracking error. It also suggests that the size exposure for a given STOXX World “core” index is bigger as compared with its fixed-constituent counterpart, which likely contained smaller-cap names. Interestingly, despite the additional liquidity screens in place for the new indices, liquidity itself did not account for much of the risk difference.

The small differences in holdings and tracking error mean that many of the metrics we show in the risk monitors are very similar. For example, the chart below shows the short-horizon fundamental risk forecast from the US4 model, and the cumulative return over the past year for the (original) STOXX USA 900 Index and the new STOXX US. Clearly the lines are almost indistinguishable.

The picture is somewhat different for emerging markets Indices. Here, the presence of China’s A and P shares and the country allocations made the new STOXX World Emerging Markets index slightly riskier through the last year along with a 2% lower return. But keep in mind that the new tradability requirements and foreign restrictions made this a more representative and attainable index for a global investor.

Overall, we believe the building block approach to the new STOXX World Equity indices, along with tradability constraints and transparent rules, result in a user-friendly and consistent series of indices and benchmarks that will enhance asset allocation, performance assessment and research and that can form a strong basis for structured products and other index-linked investment vehicles. Please take a look to our daily risk monitors and future weekly commentary for more information and analysis.

[1] Tracking error is based on the medium-horizon fundamental model variant from the region that most closely matches the index construction, and is the same model used in the risk monitor. Tracking error is as of August 4, 2023.