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Index IDEA: Multi-factor indexes mine long-term benefits of quality and value

Global index provider FTSE Russell recently compared historical and current index performance and characteristics for the Russell 1000 2Qual/Val 5% Capped Index relative to the US large cap Russell 1000 Index. Findings help illustrate how indexes that blend market factors in an intelligent and systematic way may be an effective tool for long-term investors:

  • While the Russell 1000 2Qual/Val 5% Capped Index—which uses a multi-factor methodology to screen for US large cap companies that exhibit strong quality and value characteristics relative to the Russell 1000 Index—was down slightly in this first quarter, it has outperformed the Russell 1000 for the 6-month, 1, 3, 5 and 10 year periods as of March 31.
  • The index has achieved this strong relative performance in part by capturing 96% of the upward performance of the Russell 1000 (known as the “up capture ratio”) and only 85% of the downward performance of the Russell 1000 (known as the “down capture ratio”).

Notable current sector allocations (as of March 31) for the Index are a large overweight to Consumer Services (6.6% more than within the Russell 1000) and Industrials (5.1% more than within the Russell 1000) and a large underweight to Financials (9.5% less than within the Russell 1000) and Oil & Gas (3% less than within the Russell 1000) sectors.

Tom Goodwin – senior index research director, FTSE Russell:

“Smart beta indexes are an exciting and innovative area of the market and, as illustrated in our newest smart beta index measuring US large cap stocks exhibiting strong relative quality and value characteristics, can be an effective way to track a certain area of the market. Our research has shown that, over time, a smart combination of quality and value factors can tap into the best of both.”

Rob Bush – ETF strategist, DWS:

“At DWS, we believe that multi-factor investing can be a valuable strategy for investors, and we are delighted to continue our collaboration with FTSE Russell to introduce an intuitive multi-factor approach that effectively views the market through the lens of an active manager. Investors seeking stocks with strong Quality metrics—high returns on assets, low accruals, increasing asset efficiency, low leverage—might also prefer such companies at lower valuations, hence QARP - Quality at a Reasonable Price.”

Note: QARP, or Quality-at-a-Reasonable-Price, is an investment strategy that seeks to invest in perceived high quality companies trading at a discount relative to broad market valuations.

DWS ETFs recently launched a new ETF based on the Russell 1000 2Qual/Val 5% Capped Index. For more information and insight on smart beta and multi-factor indexes from FTSE Russell, go to the FTSE Russell website.



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