Today, trading starts in Eurex-listed futures tracking 12 STOXX® Industry Neutral Ax Factor Indices. The derivatives cover the European and US markets and allow investors to target well-researched and robust factor strategies from Axioma’s Risk Models and optimization tools.
The STOXX Industry Neutral Ax Factor Indices are derived from industry-leading regional benchmarks — the STOXX® Europe 600 Index and STOXX® USA 500 Index — and track six factor styles: Value, Momentum, Size, Low Risk, Quality and Multi-Factor.
To find out more about this new offering, we caught up with Hamish Seegopaul, Qontigo’s Managing Director, R&D for ESG and Quantitative Indices; and Zubin Ramdarshan, Head of Equity & Index Product Design at Eurex.
Hamish Seegopaul, Managing Director, R&D for ESG and Quantitative Indices – Qontigo
Zubin Ramdarshan, Head of Equity & Index Product Design – Eurex
Zubin, what’s driving demand for factor-based investment instruments?
Zubin: “We have growing demand from investors looking for smart approaches to extract equity premium. And as of today, there is no listed offering of risk premia derivatives consistent across regions and factors, which can be used for tactical management of equity risk factor portfolios.
“Risk premia futures form a toolbox that may facilitate more efficient management of portfolios as an overlay or as fundamental building blocks.
“We have received positive feedback from existing factor managers who will use these new factor futures for tactical allocation. Some other clients who are not risk premia investors as of today, now see a good use case to implement broad factor strategies from time to time.”
What makes these futures stand out?
Zubin: “Backed by a strong, rules-based methodology developed by STOXX, Qontigo’s index provider, these first factor-based instruments offer global coverage with a consistent methodology across regions.
“The STOXX factor indices utilize Axioma’s expertise, factor risk model definitions and optimizer, which many institutional clients are already familiar with. They are weighted to maximize the exposure to the required target factor subject to a set of constraints. They are based on 200 leading large-, mid- and small-caps from Europe — the universe of the STOXX Europe 600 Index — and the 500 largest US companies. The new products cover 12 futures on the sector-neutral versions of the STOXX Axioma Value, Quality, Momentum, Low Risk, Size and Multi-Factor indices. The Eurex factor product range will provide a persistent offering across regions, which portfolio managers can utilize on a global basis. Compared to trading the underlying or using over-the-counter (OTC) instruments for tactical management, futures offer an easy, transparent and cost-efficient way to adjust positions. The product design follows the well-known specifications already in place for benchmark and blue-chip index derivatives such as those on the STOXX Europe 600.”
Hamish, Qontigo has a long history of being an innovator in the factor investing space. How have you leveraged that expertise to launch these indices?
Hamish: “We’re excited to bring some of the same tools and techniques used by quantitative managers for decades to the index space, and now with our partners at Eurex, the derivatives space. We decided to introduce the STOXX® Ax Factor Indices and the STOXX® Industry Neutral Ax Factor Indices to give investors a choice that ensures strong target factor exposure, but also controls unintended biases, something that is key when seeking specific factor premia exposures. At Qontigo, we are able to do this by leveraging our deep optimization and risk modelling history in order to seek the target exposures we think investors are after.
“In terms of practical management, as Zubin mentioned, the indices bring a consistent methodology that works across factors and regions.
“This can be especially useful for users of listed derivatives, who may employ multiple factors for portfolio overlays or tactical positions.”
There are some specific characteristics incorporated in the indices’ methodology. What do these aim to achieve?
Hamish: “There are three areas upon which we placed specific focus in designing the STOXX Industry Neutral Factor indices. Firstly, as mentioned, was the objective to target the intended factor and limit unintended factor exposures. We employ robust factor definitions from Qontigo’s Axioma Factor Risk Models to do this, which are in use within some of the largest institutional investors in the world. Secondly, our factor indices aim to deliver tradability, by limiting exposure to less liquid names and controlling for turnover and maximum weights, in order to increase capacity and reduce trading costs. Thirdly, the index methodology upholds diversification through constraints on country and industry exposures, as well as individual security weights.
“It may also be useful to highlight that the STOXX Industry Neutral Ax Factor Indices are versions of the standard STOXX Factor Indices that limit the active industry constraint from +/- 5% to near neutral. This was one of the feedbacks from the joint market consultation with Eurex, where potential investors favored sacrificing some factor exposure to benefit from targeting lower levels of active industry risk. The latter further reduces what investors may consider unintended exposures. What’s important to us is to offer investors that flexibility and choice in order to deliver the outcomes they seek.”
How do you see this segment of the equity index market evolving?
Zubin: “We have no doubt it will grow, because it offers an easy, transparent, and cost-efficient alternative relative to trading the underlying equities or using OTC instruments. Eurex sees this as a strategic launch and part of a broader listing strategy. The aim is to create benchmarks based on indices that employ established, commercially accepted factor definitions and clear, transparent index construction rules. Here we are utilizing Axioma’s expertise and strong branding in the risk premia community. This first launch phase will include factors in Europe and the US. Japan and Global will be added at a later stage depending on the evolution in demand. The inclusion of the Multi-Factor index represents an expansion into the quantitative investment strategy (QIS) index space. A direction that we at Eurex already looked towards with plans for systematic and custom index listings originating from our own members.”
Hamish: “Investors continue to recognize that all investments are made up of factor exposures, and knowing and controlling your exposures is a key part of modern portfolio management. Because of that, and the growing acknowledgement that you can access specific sources of equity risk premia, factor investing and index-based smart beta have been an area of strong growth in recent years. More recently, the resurgence of the Value factor has brought a spotlight back to factor investing, following years of challenging performance.
“As technology enables more complex investment strategies to be brought to market in a transparent manner, we welcome the listing of futures on Eurex as it allows for a broader audience to target these strategies in an efficient and simple way. With improved access to factor targeting, and as the benefits of factor-based strategies become even more widely recognized, we will continue to see more growth in this segment.”
