10 - Financial Metrics

Financial Metrics — ISS & STOXX Glossary

About This Section

This glossary covers return calculations, volatility measures, risk-adjusted performance metrics, and factor exposures used in index analytics. Terms are sourced from STOXX and ISS Governance official documentation.

~59 terms across multiple sources.

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A

Active Return

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Quote

“After costs, the return on the average actively managed dollar will be less than the return on the average passively managed dollar.”

— William F. Sharpe, The Arithmetic of Active Management (1991)

The difference between a portfolio’s return and its benchmark return over a given period, representing the value added (or lost) by active management decisions.

Note

active return tells you how much better or worse a fund did compared to the index it tracks. If a portfolio gained 12% and the benchmark gained 10%, the active return is +2%.

$$R_{\text{active}}=R_{\text{portfolio}}-R_{\text{benchmark}}$$

Related terms

Alpha, Tracking Error, Information Ratio

Source excerpts (5)

tperformance has been consistent, too, with the notable exception of the COVID-19-induced sell-off in early 2020. Figure 2 shows the DAX ESG Target’s active return in a dotted line. ‘Specific returns’ refers to the idiosyncratic component from each stock’s return that can’t be explained by a style factor.

— DAX ESG Target: An optimal solution to risk, return and impact in German stoc…

As the chart shows, there is a high shift in performance of single factors from year to year. Figure 1: Active returns of STOXX European factor indices A multifactor strategy can smooth out that cyclicality by avoiding allocating too much weight on any single factor,

— Harnessing factor strategies: Controlling risk and sustainability efficiently…

This relationship is not perfect, however, and it is also important to note that the active return was positive far more often than it was negative, both on a quarterly and an annual basis. Exhibit 2: Scatterplot of active vs.

— The diversification benefits of a multi-factor approach: the STOXX Europe 600…

This multi-signal approach avoids the overreliance on any single distorted metric that can negatively impact returns.” Figure 1: Active returns – USA Value factor “Momentum is another compelling example. Traditionally, it’s been defined using a stock’s simple, 12-month share-price appreciati

— Q&A with BlackRock: fourth year of multifactor collaboration with STOXX a…

In Figure 1, we show Q3 and YTD returns for the STOXX Factor Indices in excess of their benchmark – a remarkable year so far for active returns, in both the ‘right’ and ‘wrong’ directions. Figure 1 – STOXX Global 1800 factors 2020 active returns Methodology Spotlight: To constrain or not to

— STOXX Factor Indices Q3 Spotlight – To Constrain or not to Constrain | Blog p…

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Alpha

▰▰▰▰ 189

Quote

“The evaluation of portfolio performance requires a measure of the excess return earned beyond that expected given the level of risk.”

— Michael C. Jensen, The Performance of Mutual Funds in the Period 1945-1964 (1968)

The excess return of a portfolio relative to the return predicted by the Capital Asset Pricing Model (CAPM), given the portfolio’s systematic risk exposure (beta). Alpha isolates manager skill from market movement.

Note

Alpha is the portion of a portfolio’s return that cannot be explained by broad market moves. Positive alpha means the manager outperformed what the market risk alone would have predicted.

$$\alpha =R_{\text{portfolio}}-[R_f+\beta \cdot (R_m-R_f)]$$

Where $R_f$ is the risk-free rate and $R_m$ is the market return.

Related terms

Beta, Active Return, Risk-Adjusted Return, Equity Risk Premium

Source excerpts (5)

Implications of Index Reconstitutions: Free Carbon Alpha? SEPTEMBER 22, 2022 KEY TAKEAWAYS - ISS ESG’s Climate Impact Report provides a detailed analysis of a portfolio’s carbon footprint, with 99.85% of co

— Implications of Index Reconstitutions: Free Carbon Alpha? | ISS

ne clear consequence of striving for target factor purity via constraints on other systematic sources of risk, is that stock specific risk (i.e. dumb alpha since there was no stock-level research inputs), becomes more and more influential in the performance of these portfolios.

— Smart Beta versus Dumb Alpha | Blog posts | STOXX

Ang. “We continuously want to push the definitions of these factors.” Other ESG signals An additional example of a climate alpha signal can be found in companies with the most LEED-certified,2 or carbon-efficient, buildings.

— BlackRock’s Ang on sustainability alpha signals: ESG and factors as ‘best fri…

The one- way turnover limit is 20% per rebalance. 42 Grinold, Richard C. (1994) “Alpha is Volatility Times IC Times Score, or Real Alphas Don’t Get Eaten.” Journal of Portfolio Management, vol. 20, no. 4 (Summer) 9-16 iSTOXX® METHODOLOGY GUIDE 372/1024 24.

— Istoxx Index Guide (PDF), p. 371

Three or four factors fared well in most years. None of the factors were able to produce positive returns in the worst year for alpha, 2020. (Figure 1). Figure 1: Annual return from alpha FMP “The idea behind choosing several factors is that when one doesn’t ‘work,’ another will pic

— Not so fast. Factor investing is alive and doing well! | Blog posts | STOXX

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Annualized Return

▰▰ 16

Quote

“Compound interest is the eighth wonder of the world.”

— Albert Einstein (attributed)

The geometric average amount of money earned by an investment each year over a specified time period, compounding gains and losses into a single annual rate.

Note

Annualized return converts a total multi-period return into a yearly figure so you can compare investments held over different time spans on equal footing.

$$R_{\text{ann}}={\left(1+R_{\text{total}}\right)}^{\frac{1}{n}}-1$$

Where $n$ is the number of years in the holding period.

Related terms

Total Return, Gross Return, Net Return

Source excerpts (5)

Propelled by their stellar performance in 2020, the FAANGs portfolio has posted an annualized return for the 2020-2022 period of 14%, outperforming the STOXX USA 900 index by 6 percentage points over this period. Figure 3 – Annualized returns The US

— From pandemic profiteers to stagflation hostages: FAANGs stranglehold weighs …

While a strategy that aims to exclude a single day may not be realistic, it is nevertheless instructive in the potential risks and rewards. Figure 1: Annualized return range with best or worst days per year removed The table comes from a new STOXX whitepaper that contributes to the research on market timing by attem

— Measuring the difficulty of market timing | Blog posts | STOXX

All tech-oriented thematic indices beat the broad Global 3000 index. Figure 1 – Annualized returns, 2012-2021 Drivers of returns Fundamental factors, as reflected by the Axioma Worldwide medium-horizon fundamental model, contributed the most to al

— Why Artificial Intelligence Outperformed Digital Security – A Factor Analysis…

Weight caps are in place to ensure diversification. Capturing the growth tilt The B.R.AI.N. Index had an annualized return of 24% in the five years to Jul. 16, 2018.3 That is exactly twice the 12% annual return for the STOXX Developed Markets Total Market Index. Chart 1 s

— B.R.AI.N. Index Tracks Disruptive Technologies | Blog posts | STOXX

A STOXX analysis last December found that exclusions as incorporated by the STOXX Europe 600 ESG-X Index had added nearly 23 basis points in annualized returns over the STOXX Europe 600 Index since 2012, while increasing the annualized volatility by 6 basis points: results that don’t diverge from those of t

— ESG-X: A New, Comprehensive Family of Sustainability Indices | Blog posts | S…

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B

Basis Point

▰▰▰▰▰ 456

One hundredth of one percentage point (0.01%), used to express small changes in interest rates, yields, spreads, and fund fees. 100 basis points equal 1 percentage point.

Note

Basis points remove ambiguity when discussing rate changes. Saying “rates rose 50 basis points” is unambiguous, whereas “rates rose half a percent” could be confused with a relative change. Nearly every STOXX and ISS yield, spread, and fee figure is quoted in basis points.

$$1\text{bp}=0.01\%=0.0001$$

So a move from 2.50% to 3.00% is a change of 50 bp.

Related terms

Spread (Credit), Yield Curve, Risk-Free Rate

Source excerpts (5)

WS / December 2021 Low Carbon indices Key points Among the STOXX Low Carbon indices, the EURO STOXX® 50 Low Carbon index beat the EURO STOXX 50 by 17 basis points in December but trailed by 40 basis points for the entire 2021. The STOXX Low Carbon indices were designed to help reduce the carbon footprint of po

— Monthly Index News December 2021 (PDF), p. 17

The index targets stocks with high growth potential based on earnings and dividends. It has returned 5.2% in the past year, 970 basis points more than the value gauge and 230 basis points more than the STOXX Europe 600. Risk and return characteristics Return (%) Annualized volatility (%)

— Monthly Index News June 2018 (PDF), p. 3

G index outperformed its benchmark by 26 basis points. The STOXX® Global ESG Select KPIs index, on the other hand, lagged the STOXX Global 1800 by 85 basis points. The STOXX ESG Select KPIs indices offer a broad market exposure that is tilted towards companies that score better with respect to a small set of e

— Monthly Index News July 2024 (PDF), p. 11

_____________________________________ Overview 1 – Design of ETRFs TRFs follow the OTC total return swap structure, quoted as an annualized spread in basis points that represents the premium added to an overnight funding benchmark rate to determine the financing cost. The holder of the long position receives t

— Q&A with Eurex: Switching OTC swaps to a capital-efficient alternative un…

The STOXX® North America Industry Neutral ESG Index outperformed by nearly 30 basis points. Other indices diverted from their benchmarks by a wider margin. The STOXX® USA ESG Impact Index underperformed by almost 50 basis points.

— Monthly Index News February 2019 (PDF), p. 7

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Beta

▰▰▰▰ 194

Quote

“Beta measures the sensitivity of a stock’s return to the return on the market portfolio.”

— William F. Sharpe, Capital Asset Prices (1964)

A measure of a security’s or portfolio’s systematic risk relative to the overall market. A beta of 1.0 indicates the asset moves in lockstep with the market; values above or below 1.0 indicate amplified or dampened sensitivity.

Note

Beta tells you how much a stock tends to move when the market moves. A stock with a beta of 1.5 historically rises or falls 50% more than the market in either direction.

$$\beta =\frac{\text{Cov}(R_i,R_m)}{\text{Var}(R_m)}$$

Related terms

Alpha, Equity Risk Premium, Factor Exposure

Source excerpts (5)

Australian ETF manager BetaShares has launched its 50th ASX-traded fund, the Global Quality Leaders ETF (QLTY). QLTY provides access to a diversified portfolio of quality global

— BetaShares launches Global Quality Leaders ETF - ETF Express

It reflects our dedication to our clients and the innovative contribution we make to their businesses. Our smart-beta expertise in factor and thematic strategies allows us to address rising sophistication among Asian investors looking to diversify beyond traditional

— STOXX Awarded “Best Smart Beta Index Provider, Asia-Pacific” By SRP | Press r…

This also means that it can be combined with a higher beta portfolio (e.g. small caps) to give an average beta in line with targets, while providing outperformance on each satellite.

— Stoxx Minvar Paper (PDF), p. 22

In “An Aussie sense of style”, Axioma’s latest paper on smart beta products, we take a look at the inherent compromise between delivering target factor purity versus maximizing factor exposure.

— Smart Beta versus Dumb Alpha | Blog posts | STOXX

A new Qontigo report1 takes a comprehensive look at the market for ‘smart beta’ funds tracking factor strategies, to assess their prowess in boosting returns and their capacity as money inflows grow. The study by Frank Siu, Exec

— Study Shines Light on Smart Beta’s Effectiveness and Capacity | Blog posts | …

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Book-to-Price Ratio

▰ 1

Quote

“Price is what you pay. Value is what you get.”

— Warren Buffett

The ratio of a company’s book value of equity to its market capitalisation. It is the inverse of the more commonly cited price-to-book ratio and is widely used as a value factor in index construction.

Note

Book-to-price tells you how much of a company’s accounting net worth you get for each dollar of market price. Higher values suggest the stock may be undervalued relative to its assets.

$$\text{B/P}=\frac{\text{Book Value of Equity}}{\text{Market Capitalisation}}$$

Related terms

Price-to-Earnings Ratio, Earnings Yield, Cash Flow Yield

Source excerpts (1)

alendar INDEX REVIEW Selection list: On a quarterly basis, the momentum factor is calculated for each stock after adjusting for market beta, size and book-to-price ratio. First, the beta and alpha of each stock is calculated using the formula below: 17www.stoxx.com/documents/stoxxnet/Documents/Resources/Data_Vendor_Co

— Istoxx Index Guide (PDF), p. 264

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C

Cash Flow Yield

▰▰▰ 26

Quote

“Revenue is vanity, profit is sanity, but cash is king.”

— Anonymous

The ratio of operating cash flow per share to the current share price. It measures how much cash a business generates relative to its market valuation and is used as a value factor in index screening.

Note

Cash flow yield is like dividend yield’s more comprehensive cousin: it looks at all the cash the business produces, not just what it pays out. Higher values can signal undervaluation.

$$\text{Cash Flow Yield}=\frac{\text{Operating Cash Flow per Share}}{\text{Price per Share}}$$

Related terms

Earnings Yield, Dividend Yield, Book-to-Price Ratio

Source excerpts (4)

%, 13%, and 7% weights, respectively, and is again z-scored and truncated. The Value Factor is a composite of the following 5 Signals: Book to Price, Cash Flow Yield, Time Series Normalized Cash Flow Yield, Dividend Yield and Earnings Yield.  Book to Price is given by the latest book value divided by the total ma

— Stoxx Index Guide (PDF), p. 588

%, 13%, and 7% weights, respectively, and is again z-scored and truncated. The Value Factor is a composite of the following 5 Signals: Book to Price, Cash Flow Yield, Time Series Normalized Cash Flow Yield, Dividend Yield and Earnings Yield.  Book to Price is given by the latest book value divided by the total ma

— Stoxx Index Guide (PDF), p. 588

, 25%, and 25% weights, respectively, and is again z-scored and truncated. The Value Factor is a composite of the following 4 Signals: Book to Price, Cash Flow Yield, Time Series Normalized Cash Flow Yield, and Earnings Yield. Book to Price is given by the latest book value divided by the total market capitalizati

— Istoxx Index Guide (PDF), p. 919

anies. Value The value score is calculated from the following current book value to price ratio, 12-month trailing dividend yield, earnings yield and cash flow yield (i.e., cash flow divided by the full market capitalization), and time series normalized cash flow yield over the previous 36 months. Low volatility T

— STOXX Equity Factor Indices | STOXX

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Compound Annual Growth Rate (CAGR)

▰▰ 6

Quote

“Compound interest is the eighth wonder of the world.”

— Albert Einstein

The constant annual rate of return that would take an investment from its beginning value to its ending value over a specified period, assuming profits are reinvested. It smooths out year-to-year volatility into a single annualized figure.

Note

CAGR is the go-to metric for comparing growth rates across different time horizons. Unlike simple average returns, it accounts for compounding and gives the true geometric growth rate.

$$\text{CAGR}={\left(\frac{V_{\text{end}}}{V_{\text{begin}}}\right)}^{\frac{1}{n}}-1$$

Where $V_{\text{begin}}$ and $V_{\text{end}}$ are the starting and ending values, and $n$ is the number of years.

Related terms

Annualized Return, Total Return

Source excerpts (5)

Biotechnology is now extensively used in the medical industry, biofuels and agribiotech. The global Robotics market is expected to boost revenue at a compound annual growth rate of 16% between 2017 and 2025, to $154 billion.1 Lower costs and increasing output efficiency, safety and reliability are fueling demand for smart mac

— B.R.AI.N. Index Tracks Disruptive Technologies | Blog posts | STOXX

The global alcoholic beverages market is expected to continue growing at a compound annual growth rate (CAGR) of more than 1%. - The alcoholic beverages industry has demonstrated resilience: despite global market-related disruption, alcohol sales have acceler

— Thriving Global Alcohol Market: Emerging Trends and Risks | ISS

ones with peers from the same ICB Supersector group. Figure 1: EURO STOXX 50 ESG derivatives volume Source: STOXX, Eurex. Only roll months are shown. Compound annual growth rate is based on total annual volume per year. Just this year the evolution in ESG index derivatives took one step further with the introduction of a Soci

— Monthly Index News April 2024 (PDF), p. 4

sured against 2011 revenue (34% weighting)  Compound annual constant currency growth rate for EBITDA, measured against 2011 EBITDA (33% weighting)  Compound annual growth rate for registered customers, measured against 2011 registered customers levels (33% weighting) Note: threshold, target and maximum level goals are not d

— Western Union (PDF), p. 16

services, will rise 27% this year to USD 154 billion from a year earlier.[6] IDC analysts see that expenditure exceeding USD 300 billion in 2026 — a compound annual growth rate of 27% over the 2022-2026 period. Broader technology boom To be sure, investor enthusiasm for breakthrough scientific applications is not limited to

— The AI revolution is taking place now – a look inside the STOXX Global Artifi…

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Correlation

▰▰▰▰▰ 305

Quote

“Diversification is protection against ignorance.”

— Warren Buffett

A statistical measure that quantifies the strength and direction of the linear relationship between two variables’ returns, ranging from -1 (perfect negative) to +1 (perfect positive). A value of 0 indicates no linear relationship.

Note

Correlation tells you whether two assets tend to move together, apart, or independently. It is a cornerstone of portfolio construction: combining assets with low or negative correlation reduces overall portfolio risk.

$${\rho }_{X,Y}=\frac{\text{Cov}(X,Y)}{{\sigma }_X\cdot {\sigma }_Y}$$

Related terms

Covariance, Beta, Volatility, Standard Deviation

Source excerpts (5)

The STOXX Factor Indices, on the other hand, saw more differentiation through the crisis, i.e. active correlations across factors moved closer to 0. This can partly be attributed to the focus on increased style purity of the individual factors.

— STOXX Factor and STOXX ESG-X Factor Indices Q2 Spotlight – Mixed Performance,…

Various scenarios of director overboarding were evaluated against Economic Value Added’s (EVA) Margin & Momentum, ISS’ proprietary measures; and a correlation was found between overboarding and economic under performance. This correlation could signal that shareholders, investors and issuers may benefit fro

— Public Fund Us Policy Updates (PDF), p. 5

A correlation of 1 means two assets move in lockstep, while a reading near zero suggests little to no relationship. A correlation of -1 implies the assets tend to move in opposite directions. Figure 4: Thematic categories – correlation The higher correlation observed in the Futu

— 15 years of STOXX Thematic indices: What the track record shows | Blog posts …

All three are significantly lower than their March 2020 peaks. The three measures showed a relatively high negative correlation to the underlying stock market in April. Risk and Return Characteristics Index Level Correlation T T-1M T-12M 1M 1Y 1.

— Monthly Index News April 2021 (PDF), p. 31

“That discount may present something of a sweet spot for investors.” Regional correlations Nico also highlighted research from STOXX that shows European stocks provide de-correlation in global portfolios (Figure 3).

— Europe’s ‘Magnificent’ equities in focus at ETF Ecosystem Unwrapped event | B…

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Covariance

▰▰▰▰ 58

Quote

“The portfolio problem is to find the combination of securities that gives the investor the return he wants with the least variance.”

— Harry Markowitz, Portfolio Selection (1952)

A measure of the joint variability of two random variables. In finance, it quantifies how the returns of two assets move together. Positive covariance means they tend to move in the same direction; negative means opposite directions.

Note

Covariance is the raw building block behind both correlation and beta. While its absolute magnitude is hard to interpret (it depends on the scale of returns), it feeds directly into portfolio variance calculations and the Capital Asset Pricing Model.

$$\text{Cov}(X,Y)=\frac{1}{n-1}\sum _{t=1}^n(X_t-\bar{X})(Y_t-\bar{Y})$$

Related terms

Correlation, Beta, Standard Deviation, Factor Exposure

Source excerpts (5)

= covariance18 of share i=1, …, 40 to share j=1, …, 40 i,j Step 3) The optimized portfolio weights can then be calculated, based on the variances and covariances calculated in Step 2. The function to be optimized is as follows: 𝑟 −𝑟 𝑝 𝑓 𝑠𝑟 = 𝑝 𝜎 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 The Sharpe ratio is the difference between a portfolio

— Dax Equity Index Methodology Guide 5526498614 (PDF), p. 80

: (𝑤)𝑇(𝐵𝑉𝐵𝑇 +∆2) 𝑤 where, w = Index weights B = Exposure matrix, its elements denote each asset’s exposure/loading to a particular factor V = Factor covariance matrix from Axioma Risk Model ∆2 = Specific variance matrix from Axioma Risk Model. iSTOXX® METHODOLOGY GUIDE 786/1024 109.

— Istoxx Index Guide (PDF), p. 785

ANCE INDICES Although no expected returns are needed to create MVPs, there are three important inputs that are needed: i) a forecast of variances and covariances ii) an optimization engine iii) a set of constraints that ensures the portfolio is reasonably investable More details of the approach taken can be f

— Stoxx Minvar Paper (PDF), p. 6

The ex-ante (predicted) risk of the portfolio is a combination of the portfolio weights, factor exposures and covariance matrices. Without a risk model, a portfolio of 500 securities would have over 125,000 inputs to estimate.

— Tracking error: making sense of a key investment statistic | Blog posts | STOXX

STOXX OPTIMISED INDICES where (cid:1854) = Parent Index weights (cid:1875) = Index weights (cid:1843) = covariance matrix for the Axioma Risk Model The Axioma Risk Models used for the STOXX Optimal 100 Indices are listed below: Index Risk Model (numeraire) Axioma

— Stoxx Index Guide (PDF), p. 132

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Current Ratio

▰ 2

The ratio of a company’s current assets to its current liabilities, measuring its ability to pay short-term obligations due within one year. It is a fundamental liquidity metric used in credit screening and quality factor construction.

Note

The current ratio answers: “Can this company cover its near-term bills with the assets it could readily convert to cash?” A ratio above 1.0 means current assets exceed current liabilities; below 1.0 signals potential liquidity stress.

$$\text{Current Ratio}=\frac{\text{Current Assets}}{\text{Current Liabilities}}$$

Related terms

Debt-to-Equity Ratio, Free Cash Flow (FCF), Gross Profitability

Source excerpts (2)

The LR is calculated as the ratio of current assets to current liabilities (also called current ratio) 1YΔLR =current ratio −current ratio t0 t0 t−1 - 1-year growth in the Number of Shares Outstanding (1YΔNBO) less than or equal to 5%7. number of shar

— Istoxx Index Guide (PDF), p. 76

ness and frequency to provide up-to-date financial statements, adhering to financial requirements (such as profitability, leverage ratio, cash ratio, current ratio and debt to equity ratio) and the auditing of financial statements. Transparency criteria include checks on the Proof of Reserves (PoR) and Proof of

— Stoxx Digital Asset Guide (PDF), p. 9

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D

Debt-to-Equity Ratio

▰▰▰▰ 87

Quote

“The one thing I can tell you is that the secret to investing is that there is no secret — except managing debt and costs.”

— Benjamin Graham, The Intelligent Investor (1949)

The ratio of a company’s total debt to its total shareholders’ equity. It measures financial leverage, indicating how much of the company’s capital structure is financed by creditors versus owners.

Note

Debt-to-equity is one of the most watched leverage gauges. A high ratio means the company relies heavily on borrowed money, which amplifies both gains and losses. STOXX and ISS use it in quality screening and ESG risk assessment.

$$\text{D/E}=\frac{\text{Total Debt}}{\text{Total Shareholders’ Equity}}$$

Related terms

Current Ratio, Enterprise Value (EV), EBITDA

Source excerpts (5)

Large increases in borrowing powers can sometimes result in dangerously high debt-to-equity ratios that could harm shareholder value. If no information regarding the limit on the borrowing power is disclosed, no credible explanation for the need o

— Hong Kong Voting Guidelines (PDF), p. 16

crease in debt is considered excessive: ▪ The proposed maximum amount is more than twice the company’s total debt; ▪ It could result in the company’s debt-to-equity ratio, or gearing level, exceeding 300 percent; and ▪ The maximum hypothetical debt-to-equity ratio is more than three times the industry and/or market nor

— India Voting Guidelines (PDF), p. 12

Large increases in borrowing powers can sometimes result in dangerously high debt-to-equity ratios that could harm shareholder value. If an increase is excessive without sufficient justification and if a company already has exceptionally high gear

— 2015 Taft Hartley Advisory Services International Guidelines (PDF), p. 25

han twice the company’s total › The proposed maximum amount is more than twice the company’s total debt; debt; › It could result in the company’s net debt-to-equity ratio, or gearing level, › It could result in the company’s debt-to-equity ratio, or gearing level, exceeding 300 percent; and exceeding 300 percent; and ›

— Asia Pacific Policy Updates (PDF), p. 21

debt may be considered excessive when: › The proposed maximum amount is more than twice the company’s total debt; › It could result in the company’s debt-to-equity ratio exceeding 300 percent (for non-financial companies); and › The maximum hypothetical debt-to-equity ratio is more than three times the industry and/or

— 1 2016 Hongkong Voting Guidelines Dec 2015 (PDF), p. 11

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Dividend Yield

▰▰▰▰▰ 755

Quote

“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”

— John D. Rockefeller

The annual dividends paid per share divided by the share price, expressed as a percentage. In index methodology, it typically refers to the indicated (forward-looking) annual dividend.

Note

Dividend yield shows the percentage income return you earn from owning a stock at today’s price, ignoring any capital gains. It is a core input for STOXX’s dividend-weighted and high-dividend indices.

$$\text{Dividend Yield}=\frac{\text{Annual Dividends per Share}}{\text{Price per Share}}\times 100\%$$

Related terms

Total Return, Net Return, Gross Return, Earnings Yield

Source excerpts (5)

The inverse of the payout ratio is calculated as earnings per share (EPS) divided by gross dividend per share (DPS 15 WSPIT Item number 09402 - Dividend Yield – Current; Worldscope Fundamentals iSTOXX® METHODOLOGY GUIDE 252/1024 10. iSTOXX MUTB INDICES gross).

— Istoxx Index Guide (PDF), p. 251

Global Select 100 EUR Index, which is measured in euros, ended October with little change compared to the previous month. The index blends increasing dividend yields with low volatility. Risk and return characteristics Return (%) Annualized volatility (%) EUR USD EUR USD 1M YTD 1Y 1M YTD 1Y 1M YTD 1Y 1M YTD 1Y P/

— Monthly Index News October 2019 (PDF), p. 13

If a company has not been publicly traded for at least three years, ISS measures volatility from the IPO date through grant date. Q Dividend Yield XpressFeed Average dividend yield over five years. If a company has not been publicly traded for at least five years, ISS averages dividend yield fro

— 2015 Us Comp Faqs (PDF), p. 11

nce factor calculation To obtain the selection list all companies are ranked according to an outperformance factor that is calculated as follows: Net dividend yield of the company versus the net dividend yield of the corresponding home market defined on an index basis. 10.1.3.

— Stoxx Index Guide (PDF), p. 113

The former can be several times higher, depending on the period. Figure 1: Dividend yield vs. income yield – EURO STOXX 50 “Covered call strategies have provided a way for investors to receive an alternative income stream that is driven ma

— Global X ETFs Europe, STOXX launch first EURO STOXX 50 covered call ETF | Blo…

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Duration (Bond)

▰▰▰▰▰ 892

Quote

“Duration is the single most important tool for measuring and managing interest rate risk in a bond portfolio.”

— Frank J. Fabozzi, Bond Markets, Analysis, and Strategies (1989)

A measure of the sensitivity of a bond’s price to changes in interest rates, expressed in years. Modified duration estimates the percentage price change for a 1% change in yield; Macaulay duration is the weighted average time to receive the bond’s cash flows.

Note

Duration is the bond investor’s most important risk number. A duration of 5 years means that if interest rates rise by 1%, the bond’s price falls by approximately 5%. Longer-duration bonds are more sensitive to rate changes.

$$D_{\text{Macaulay}}=\frac{{\sum }_{t=1}^{T}t\cdot \frac{C_t}{(1+y{)}^t}}{{\sum }_{t=1}^T\frac{C_t}{(1+y{)}^t}}{D}_{\text{Modified}}=\frac{D_{\text{Macaulay}}}{1+y}$$

Where $C_t$ is the cash flow at time $t$ and $y$ is the yield to maturity.

Related terms

Yield Curve, Spread (Credit), Risk-Free Rate, Basis Point

Source excerpts (5)

Absent this condition, the evaluation of the pill proposal will not progress to the second stage of the analysis. The pill’s total duration is defined as the sum of the number of years the company has had a pill in place and the number of years the proposed pill will be effective. The pol

— Asia Pacific Policy Updates (PDF), p. 8

As noted, the minimum burn rate benchmark for each index/industry group is 2.00%. 50. How is plan duration calculated in the EPSC? Duration is calculated as the sum of all new shares requested plus shares remaining available for issuance, divided by the av

— Us Equity Compensation Plans Faq (PDF), p. 22

Any such rectification may comprise deviations from the index methodology which may apply for the duration that the Limitation persists (Discretionary Rule, refer section ‘Discretion’)). In this context, STOXX may also decide to cancel an index review. If

— Guide To Eurogov Bond Indices (PDF), p. 19

ISS presents the more costly scenario in our proxy analysis. Plan Duration 103. How does ISS calculate the probable duration of a proposed equity plan share request? Probable duration is calculated as:  New shares requested + Shares remaining available for grant, divided b

— Issuscompensationfaqs03282014 (PDF), p. 30

Voting Guidelines be classified as independent unless determined otherwise taking into account the following factors: the terms of the agreement; the duration of the standstill provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director nominee(s)

— 2015 Us Sri Voting Guidelines (PDF), p. 17

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Drawdown

▰▰▰▰ 59

Quote

“The first rule of investment is don’t lose, and the second rule is don’t forget the first rule.”

— Warren Buffett

The peak-to-trough decline of an investment or index, measured from the highest value to the subsequent lowest value before a new peak is established. Drawdown is expressed as a percentage loss.

Note

Drawdown captures how far an investment fell from its best point before recovering. It answers the question: “If I bought at the worst time, how bad would the ride down have been?”

$$D(t)=\frac{V(t)-V_{\text{peak}}}{V_{\text{peak}}}$$

Where $V(t)$ is the value at time $t$ and $V_{\text{peak}}$ is the highest value prior to $t$.

Related terms

Maximum Drawdown, Volatility, Value at Risk (VaR)

Source excerpts (5)

It raised that exposure to 20% on August 1 and then to 30% a day later. The effect of large drawdowns Of course, having a 2.5% volatility hedge during stable and/or bull markets is a drag on returns.[5] Yet a key element of the strategy is that it at

— August market turmoil highlights benefit of dynamic volatility allocation  | …

Reversal stocks tend to underperform with a probability of 45.8% over the same horizon, the group’s highest reading. For the maximum relative drawdown compared to the benchmark from 2004-2018, the analysis shows that reversal stocks exhibit the highest relative drawdown, while the quality factor had

— The Power of Factor Diversification | Blog posts | STOXX

For a growing number of investors, MVPs are now seen as delivering the “best of all worlds”: low risk, low drawdowns and strong returns. While the popularity of these strategies has been markedly more pronounced in recent years, it should be recognized that minimum

— Stoxx Minvar Paper (PDF), p. 4

nefits of covered call strategies may include correlation reduction, diversification, risk mitigation and regular income distributions. Hedge against drawdowns Figure 1 shows the performance of the DAX and DAX Covered Call ATM indices since the start of 2021.

— DAX covered call ETF launched in new Global X ETFs Europe, STOXX collaboratio…

Since then, the index has been in an increasing volatility regime for most days. The effect of large drawdowns As mentioned earlier, the volatility hedge weighs on returns during rising markets.

— Dynamic Allocation to Volatility Reaps Record Benefit from COVID-19 Market Tu…

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E

Earnings Per Share (EPS)

▰▰▰▰ 77

Quote

“Earnings can be as pliable as putty when a charlatan heads the company reporting them.”

— Warren Buffett

The portion of a company’s net income allocated to each outstanding share of common stock. It is the most widely used single measure of corporate profitability and serves as the denominator of the P/E ratio.

Note

EPS is the bottom-line number that drives most valuation conversations. When analysts say a company “beat earnings,” they typically mean actual EPS exceeded the consensus forecast. STOXX uses EPS in value/growth style classification.

$$\text{EPS}=\frac{\text{Net Income}-\text{Preferred Dividends}}{\text{Weighted Average Shares Outstanding}}$$

Related terms

Net Income, Price-to-Earnings Ratio, Earnings Yield, PEG Ratio

Source excerpts (5)

ss dividend yield of 30% or below » All stocks having the inverse of the payout ratio of 1 or above. The inverse of the payout ratio is calculated as earnings per share (EPS) divided by gross dividend per share (DPS 15 WSPIT Item number 09402 - Dividend Yield – Current; Worldscope Fundamentals iSTOXX® METHODOLO

— Istoxx Index Guide (PDF), p. 251

The total number of the outstanding shares will then be reduced. A smaller share base will result in higher earnings per share and return on net assets. 5. AMENDMENTS TO COMPANY ARTICLES/BYLAWS General Recommendation: Vote case-by-case on amendments to company bylaws. Proposa

— Taiwan Voting Guidelines (PDF), p. 5

Projected price/earnings (P/E) ratio: Based on the closing price at the time of the review and on the mean annual earnings per share (EPS) expected for the next fiscal period, as reported by the Institutional Brokers’ Estimate System (IBES).

— Stoxx Index Guide (PDF), p. 134

s; › The company’s absolute and relative performance over (at least) the past three years based on measures such as (but not limited to) share price, earnings per share and return on capital employed; › The company’s policy and practices on non-executive director remuneration, including equity ownership; › The number

— Australia Voting Guidelines (PDF), p. 28

Depending on the risk and initial price, “good growth” should be associated with value creation and returns. Not all growth is “good.” Earnings per share growth can be gamed and top-line sales growth does not mean value creation.

— Drivers of Growth | ISS

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Earnings Yield

▰▰▰ 31

Quote

“Earnings are the lifeblood of every enterprise.”

— Anonymous

The ratio of earnings per share to the current share price, equivalent to the inverse of the price-to-earnings ratio. Used as a value factor in STOXX and ISS index construction.

Note

Earnings yield expresses how much profit a company generates for every dollar of its stock price. It flips the familiar P/E ratio to make comparisons with bond yields more intuitive.

$$\text{Earnings Yield}=\frac{\text{EPS}}{\text{Price per Share}}=\frac{1}{\text{P/E}}$$

Related terms

Price-to-Earnings Ratio, Cash Flow Yield, Book-to-Price Ratio

Source excerpts (5)

Profitability Composite Score. The Value Score is calculated from the following value metrics: • Pure/Deep value (B/P and Fwd S/P) o B/P o Fwd S/P • Earnings Yield (Fwd E/P and Fwd EBITDA/EV) o Fwd E/P o Fwd EBITDA/EV • CF Yield (OCF/P and FCF/P) o OCF/P o FCF/P All raw value metrics (e.g.

— Istoxx Index Guide (PDF), p. 382

Positive exposures to all these factors are associated with excess returns over the long term. The Oil & Gas index has shown better earnings yields than the European market since February 2022, as reflected by the positive active exposure.

— Energy prices drop, but the European oil and gas industry remains robust | Bl…

he Value Factor is a composite of the following 5 Signals: Book to Price, Cash Flow Yield, Time Series Normalized Cash Flow Yield, Dividend Yield and Earnings Yield.  Book to Price is given by the latest book value divided by the total market capitalization.  Cash Flow Yield is given by the latest 12-month cash

— Stoxx Index Guide (PDF), p. 588

A Qontigo whitepaper in 2020 showed that the Paris-Aligned strategy increases the exposure to the Profitability and Earnings Yield style factors. “What is happening here is that as you impose those constraints, other interactions are also going on,” said Dr. Ang.

— BlackRock’s Ang on sustainability alpha signals: ESG and factors as ‘best fri…

Negative active exposures include those to the Dividend Yield, Exchange Rate Sensitivity and Earnings Yield factors. Figure 8: Active style-factor exposures Conclusion The STOXX Global Artificial Intelligence index helps investors track a specific thematic

— The AI revolution is taking place now – a look inside the STOXX Global Artifi…

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EBITDA

▰▰▰▰ 52

Quote

“EBITDA makes even a lemonade stand look like a Fortune 500 company.”

— Charlie Munger (paraphrased), Poor Charlie’s Almanack (2005)

Earnings Before Interest, Taxes, Depreciation, and Amortization. A proxy for a company’s operating cash flow that strips out financing decisions, tax jurisdiction effects, and non-cash accounting charges, enabling comparisons across firms with different capital structures.

Note

EBITDA is the analyst’s favourite shortcut for “how much cash does the core business throw off?” It is the denominator of the widely used EV/EBITDA valuation multiple and a key input to credit analysis.

$$\text{EBITDA}=\text{Net Income}+\text{Interest}+\text{Taxes}+\text{Depreciation}+\text{Amortization}$$

Or equivalently:

$$\text{EBITDA}=\text{Operating Income}+\text{Depreciation}+\text{Amortization}$$

Related terms

Enterprise Value (EV), Net Income, Operating Margin, Free Cash Flow (FCF)

Source excerpts (5)

More profitable companies have higher ratios relative to their peers. EBITDAX is EBITDA including exploration expense. BOE is Barrel of Oil Equivalent. Total Production is measured in millions of BOEs.

— Ma Analysis (PDF), p. 8

The requirement applies for the main DAX and is not extended to the MDAX, SDAX or TecDAX. The rule refers to a positive EBITDA in the candidates’ two most recent annual financial statements.

— New DAX Rules, Part of Methodology Overhaul, Kick in in March 2021 | Blog pos…

In addition, measures of company progress no longer would be based on EBITDA growth and cash flow growth; rather, EVA concepts of EVA Page 2 Momentum, denominated by capital and sales, would be used to measure a comp

— 20181101 Compensation Advisory Partners (PDF), p. 1

The Value Score is calculated from the following value metrics: • Pure/Deep value (B/P and Fwd S/P) o B/P o Fwd S/P • Earnings Yield (Fwd E/P and Fwd EBITDA/EV) o Fwd E/P o Fwd EBITDA/EV • CF Yield (OCF/P and FCF/P) o OCF/P o FCF/P All raw value metrics (e.g.

— Istoxx Index Guide (PDF), p. 382

If a company would be eligible for inclusion in the DAX based on its free-float market capitalization rank but does not meet the EBITDA criterion, the next-ranked company in the selection list that meets the EBITDA criterion will be considered for inclusion.

— Dax Equity Index Methodology Guide 5526498614 (PDF), p. 36

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Economic Value Added (EVA)

▰▰▰▰ 56

Quote

“EVA is the financial performance measure that comes closer than any other to capturing the true economic profit of an enterprise.”

— G. Bennett Stewart III, The Quest for Value (1991)

A proprietary measure of a company’s financial performance defined as after-tax operating profit minus a charge for the capital employed to generate that profit. EVA quantifies whether a firm is creating or destroying shareholder value.

Note

EVA asks a simple question: did the company earn more than the cost of the money it used? If EVA is positive, the business is generating wealth beyond what investors could have earned elsewhere at the same risk.

$$\text{EVA}=\text{NOPAT}-(\text{WACC}\times \text{Invested Capital})$$

Related terms

EVA Margin, Net Operating Profit After Tax (NOPAT), Gross Profitability

Source excerpts (5)

However, for meetings on or after Feb. 1, 2020, the measures utilized by the secondary FPA screen will be Economic Value Added (EVA) metrics instead of the GAAP metrics that were used in 2019. The GAAP metrics will continue to be displayed in research reports for informational purp

— Canada Executive Compensation Faq (PDF), p. 19

Topics covered included board gender diversity, forward-looking compensation improvements, and the potential use of Economic Value Added (EVA) measures in the ISS pay for performance model. In Europe, three separate in-person roundtable discussions were held with institutional investors in S

— Executive Summary Of Iss Policy Updates And Process (PDF), p. 5

A) will not be added as a modifier to the Australian pay-for- performance screens for 2020. However, ISS will explore the potential for future use of Economic Value Added (EVA) measures to add additional insight into a company’s financial performance.

— Australia Preliminary Compensation Faqs (PDF), p. 3

Our research team recently published their 2021 Market and Sector Outlooks and will be expanding on these views with actionable insights. EVA (Economic Value Added) is a measure of firm profitability with respect to cost of capital, can be applied beyond a single stock to the market as a whole in order form a un

— ISS EVA Webinar Series: EVA Market and Sector Outlook for 2021 | ISS

This webinar will focus on Australian market and highlight the top ideas from the framework today. EVA (Economic Value Added) is a metric and measure designed to parse through the as reported financial statements and show the true economic earnings of a business.

— More EVA Is Always Better | ISS

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EVA Margin

▰▰▰ 43

The ratio of Economic Value Added to revenue, indicating how much economic profit a company earns per unit of sales. It adjusts for both operating efficiency and capital efficiency.

Note

EVA Margin tells you what fraction of each sales dollar turns into true economic profit after accounting for the full cost of capital. It rewards companies that are both operationally lean and capital-light.

$$\text{EVA Margin}=\frac{\text{EVA}}{\text{Revenue}}\times 100\%$$

Related terms

Economic Value Added (EVA), Net Operating Profit After Tax (NOPAT), Gross Profitability

Source excerpts (5)

The FPA generally utilizes four equally-weighted EVA-based metrics: ▪ EVA Margin ▪ EVA Spread ▪ EVA Momentum vs. Sales ▪ EVA Momentum vs. Capital Financial performance for these EVA metrics is measured across a three-year period (

— Canada Executive Compensation Faq (PDF), p. 10

ESG + F (financial materiality) is here to stay, as ISS’ proprietary research demonstrates that firms that exhibit both high-ESG performance and high-EVA Margin significantly outperform firms that are low-ESG and low-EVA Margin. ISS ESG EVA LEADERS INDEX SERIES Track sector-leading companies with superior eco

— ESG Index Solutions

For 2019, ISS proposes to modify the FPA methodology to use Economic Value Added (EVA) metrics in place of unadjusted GAAP metrics. “EVA Spread,” “EVA Margin,” and “EVA Momentum” will replace Return on Assets (ROA), Return on Equity (ROE), Return on Invested Capital (ROIC), Earnings Before Interest, Tax, D

— 20181101 Pearl Meyer (PDF), p. 1

FPA would shift its capital productivity and profitability measures from GAAP-based measures of ROA, ROE, and ROIC to EVA concepts of EVA Spread and EVA Margin, measured over a three-year period. In addition, measures of company progress no longer would be based on EBITDA growth and cash flow growth; rather,

— 20181101 Compensation Advisory Partners (PDF), p. 1

In fact, highly rated ISS ESG Corporate Rating firms tend to be more profitable through the Economic Value Added (EVA) lens. Also, high EVA margins combined with favorable ISS ESG Corporate ratings have historically generated above-average returns with below-average risk. ABOUT ANTHONY CAMPAGNA

— Materiality in ESG Investing: Why profitability could be your starting point …

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Equity Risk Premium

▰ 2

Quote

“The equity premium is the most important number in finance.”

— Rajnish Mehra, The Equity Premium Puzzle (1985)

The expected return of the broad equity market in excess of the risk-free rate. It represents the additional compensation investors demand for bearing systematic market risk.

Note

The equity risk premium is the extra reward you expect for putting money in stocks instead of risk-free government bonds. It is a key input to CAPM and drives the calculation of alpha and beta.

$$\text{ERP}=E(R_m)-R_f$$

Related terms

Alpha, Beta, Risk-Adjusted Return, Sharpe Ratio

Source excerpts (2)

The 5 percent threshold was chosen as a minimum ROE level which investors could accept as an equity risk premium, based on discussions with institutional investors in Japan holding Japanese equities. Therefore, the threshold should be interpreted as a minimum ac

— 2015Executivesummary (PDF), p. 15

policy reflects the unique market circumstances of Japan. The five percent threshold was chosen as a minimum ROE level acceptable to investors as an equity risk premium, based on discussions with institutional investors in Japan holding Japanese equities.

— 2015Asia Pacificpolicyupdates (PDF), p. 13

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Enterprise Value (EV)

▰▰▰▰ 84

Quote

“Enterprise value captures the total claim on a business — equity plus debt minus cash — and is the only honest starting point for valuation.”

— Aswath Damodaran, The Little Book of Valuation (2011)

The total value of a company as seen by all capital providers — equity holders, debt holders, and minority interests — minus cash and equivalents. It represents the theoretical takeover price and is the numerator in capital-structure-neutral valuation multiples like EV/EBITDA.

Note

Enterprise value gives you the full price tag of a business, not just the equity slice. It is preferred over market capitalisation when comparing companies with different debt levels because it puts them on an equal footing.

$$\text{EV}=\text{Market Cap}+\text{Total Debt}+\text{Minority Interest}+\text{Preferred Equity}-\text{Cash \& Equivalents}$$

Related terms

EBITDA, Debt-to-Equity Ratio, Earnings Yield, Price-to-Earnings Ratio

Source excerpts (5)

GHG Intensity is defined as the sum of Scope 1, Scope 2 and Scope 3 emissions from ISS ESG over Enterprise Value Including Cash (EVIC). If the GHG intensity reduction is not at least 30% versus the parent index, companies will be excluded by descending order of

— Stoxx Index Guide (PDF), p. 248

Security level carbon intensity data is equal to (Scope 1+2 emissions from ISS ESG) / (Enterprise value including cash (EVIC)) from March 2019 onwards. Carbon intensity is calculated as (Scope 1+2 emissions from ISS ESG) / Revenue from March 2014 to Dec

— Istoxx Index Guide (PDF), p. 790

, and protection and restoration of biodiversity and ecosystems. [13] Qontigo is a signatory to the Principles for Responsible Investment (PRI). [14] Enterprise Value Including Cash (EVIC) is the sum of the market capitalization of all issued equity plus total debt, minorities’ interests and cash holdings.

— World, investors gear up action to combat biodiversity loss and related risks…

Vestar invests and collaborates with incumbent management teams and private owners in a creative, flexible and entrepreneurial way to build long-term enterprise value. Vestar is targeting equity investments in the range of $50millionto$150 million in U.S.

— Vestar Capital Partners to Acquire ISS from MSCI in $364 Million Transaction …

The index ranks stocks based on inverse market capitalization and inverse enterprise value. At the same time, it imposes rules – common to all iSTOXX Factor Indices – to help manage illiquidity and high transaction costs, while preserving e

— A Closer Look at the Size Factor | Blog posts | STOXX

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F

Factor Exposure

▰▰▰▰▰ 292

Quote

“Returns are driven by systematic exposure to compensated risk factors.”

— Eugene Fama

The sensitivity of a portfolio or index to a specific systematic return driver (factor) such as value, momentum, size, or volatility. Measured as the loading coefficient in a factor regression model.

Note

Factor exposure quantifies how much a portfolio tilts towards a particular characteristic. A high momentum exposure, for example, means the portfolio is heavily loaded with stocks that have been rising.

$$R_i={\alpha }_i+\sum _{k=1}^K{\beta }_{ik}\cdot F_k+{ϵ}_i$$

Where ${\beta }_{ik}$ is the exposure of asset $i$ to factor $k$, and $F_k$ is the factor return.

Related terms

Factor Return, Beta, Return Attribution

Source excerpts (5)

In this context, the empirical findings indicate that applying constraints to limit unintended style factor exposures relative to the benchmark may help reduce the negative performance contribution and its statistical significance.

— The low volatility premium – An analysis of factor exposures of minimum varia…

1999 to Jul. 2016. Factors shown are the standard Axioma style factors. Note: cumulative factor exposures of a strategy relative to a benchmark do not generally add to zero as it is measured in terms of risk allocation.. STOXX LIMITED 9 STOXX M

— Stoxx Minvar Paper (PDF), p. 8

Spotlight – ESG-X factor exposures A key focus of the ESG-X factor indices, as highlighted in our recent blog post, is the goal of achieving similar factor exposures to our flagship, or standard-factor, versions over time. A combination of negative screening and an outcome-oriented approach (i.e.

— STOXX Factor and STOXX ESG-X Factor Indices Q2 Spotlight – Mixed Performance,…

OF methodology is adaptive to changes in the portfolio’s active exposures to both style and sectors. Active ROOF scores Figure 1 replicates the style factor exposures of the four optimized portfolios from Melissa’s second paper. All portfolios show a positive exposure to the Market Sensitivity and Volatility facto

— Measuring the implied risk tolerance of SDG-optimized portfolios | Blog posts…

During the optimization, the indices embed diversification considerations by applying caps across sectors, countries, individual companies and single-factor exposures. The methodology also controls for turnover and liquidity, and provides beta and tracking error ratios that don’t diverge significantly from the bro

— Two years of STOXX-BlackRock multifactor collaboration | Blog posts | STOXX

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Factor Return

▰▰▰ 26

Quote

“Differences in expected returns across securities are driven by differences in their exposure to systematic risk factors.”

— Eugene Fama & Kenneth French, Common Risk Factors in the Returns on Stocks and Bonds (1993)

The return attributable to a specific systematic factor over a given period. It represents the payoff to a long-short portfolio that is long stocks with high exposure to the factor and short stocks with low exposure.

Note

Factor return measures how much a particular investment style (e.g., value, momentum) paid off during a period. When the value factor return is positive, cheap stocks outperformed expensive ones.

$$F_k=R_{\text{high exposure}}-R_{\text{low exposure}}$$

Related terms

Factor Exposure, Return Attribution, Active Return

Source excerpts (5)

This is captured by the drop in the factors’ cumulative returns in 2022. Despite this recent abrupt decline, the three-year cumulative factor returns have remained positive in the US and Europe and neared zero in the UK as of Dec.

— Infrastructure: a portfolio’s barrier against inflation | Blog posts | STOXX

2019. Shaded area: Oct. 2019. Aug. 2010 – Oct. 2019. Source: STOXX Ltd. Source: STOXX Ltd. 7/14 October 2019 Premia Indices Key points Factor returns underperformed as measured by the EURO STOXX® Multi Premia® and Single Premium Indices, which are exposed to the market’s systematic risk. All but t

— Monthly Index News October 2019 (PDF), p. 8

t on the returns of the inflation expectation factors in the Macroeconomic Projection Model (Figure 2). Figure 2: Expected inflation – YTD cumulative factor return Contribution to returns The combination of factor exposures and factor returns translates into the contribution of each factor to index returns.

— How efficient an inflation hedge is real estate? | Blog posts | STOXX

Equity Factor. The study tracks the performance of a factor-mimicking portfolio (FMP) derived from the STOXX USA 900 that gives exposure to a ‘pure’ factor return, in this case a multi-factor alpha forecast. An FMP is a long-short, dollar-neutral portfolio that has an exposure of 1 to the factor in question and

— Not so fast. Factor investing is alive and doing well! | Blog posts | STOXX

We stay ahead of new developments in factor insights, evaluating and ensuring that they are additive to our high standards of explaining factor return drivers. I would describe recent factor advancements as evolutionary rather than revolutionary. We utilize many of the traditional factor metrics tha

— BlackRock’s Jamie Forbes: Implementing ‘evolutionary’ factor advancements in …

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Free Cash Flow (FCF)

▰▰ 11

Quote

“Cash flow is a fact; profit is an opinion.”

— Alfred Rappaport, Creating Shareholder Value (1986)

The cash generated by a company’s operations after deducting capital expenditures necessary to maintain or expand its asset base. FCF represents the cash available to pay dividends, reduce debt, buy back shares, or fund acquisitions.

Note

Free cash flow is the ultimate reality check: no matter what the income statement says, FCF shows how much actual cash the business produced. Companies can manipulate earnings, but cash is cash.

$$\text{FCF}=\text{Operating Cash Flow}-\text{Capital Expenditures}$$

Related terms

Cash Flow Yield, EBITDA, Net Income, Revenue

Source excerpts (5)

Does your organization agree with that approach? If not, please explain.  Not entirely. TSR is not an optimal metric; we think a 5-yr rolling free cash flow/ share would be a preferred primary metric.  EVA is a useful metric, assuming the data on which it is calculated is transparent and freely distribut

— 20181113 Generation Investment Management Llp (PDF), p. 1

YNAMIC STYLE INDICES Factor Scores are finally aggregated using the weights in brackets below to arrive at the final Quality Score. • Profitability o Free Cash Flow/Assets o Return On Assets o Return On Equity o Gross Profitability (Gross Profit / Assets) o Gross Margin o Asset Turnover • Earnings Quality o Balan

— Istoxx Index Guide (PDF), p. 380

eview, companies that have an ICB industry code of 8000. Effective with September 2020 review, companies that have an ICB industry code of 30 or 35); free cash flow (FCF) yield growth rate for all other companies All values above are observed as of the cut-off date.

— Stoxx Index Guide (PDF), p. 125

eview, companies that have an ICB industry code of 8000. Effective with September 2020 review, companies that have an ICB industry code of 30 or 35); free cash flow (FCF) yield growth rate for all other companies All values above are observed as of the cut-off date.

— Stoxx Index Guide (PDF), p. 125

ly investing up front for a would necessarily provide flexibility for the unknown, particularly in the long- return, through lower costs and improved free cash flow, in the future. The term planning assumptions around commodity prices, competitive develop- dissidents point out, however, this may be something of a

— Ma Analysis (PDF), p. 17

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G

Gross Margin

▰▰ 8

The percentage of revenue remaining after subtracting the cost of goods sold (COGS). It measures how efficiently a company converts raw materials and direct labour into revenue before operating expenses.

Note

Gross margin reveals the basic economics of a company’s product or service. A high gross margin means the company has pricing power or a low-cost production advantage, leaving more room for operating expenses and profit.

$$\text{Gross Margin}=\frac{\text{Revenue}-\text{COGS}}{\text{Revenue}}\times 100\%$$

Related terms

Gross Profitability, Operating Margin, Revenue, EBITDA

Source excerpts (2)

Companies must pass one of the following indicators in at least one of the subthemes: - Companies must rank in the top 80% of their subtheme group in Gross Margin or, - Companies with a Gross Margin greater than or equal to 50%. Individual indicators are set to zero when a data point is missing in either the Co

— Stoxx Index Guide (PDF), p. 516

Companies must pass one of the following indicators in at least one of the subthemes: - Companies must rank in the top 80% of their subtheme group in Gross Margin or, - Companies with a Gross Margin greater than or equal to 50%. Individual indicators are set to zero when a data point is missing in either the Co

— Stoxx Index Guide (PDF), p. 516

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Gross Profitability

▰▰▰ 22

Quote

“Profitability is coming from productivity, efficiency, management, austerity, and the way to manage the business.”

— Carlos Slim

The ratio of gross profit (revenue minus cost of goods sold) to total assets. Introduced by Novy-Marx (2013) as a quality factor, it measures how efficiently a firm converts its asset base into profit before overhead costs.

Note

Gross profitability strips away everything except the most fundamental question: how much raw profit does the company squeeze out of every dollar of assets? It tends to identify high-quality firms.

$$\text{Gross Profitability}=\frac{\text{Revenue}-\text{COGS}}{\text{Total Assets}}$$

Related terms

Economic Value Added (EVA), EVA Margin, Earnings Yield

Source excerpts (5)

Values are truncated at +/- 50%. The signal is smoothed using an EWMA with a half-life of 24 months.  Gross Profitability is given by the revenues minus the cost of goods sold, all divided by total assets, where all 3 quantities are all greater than 0.

— Stoxx Index Guide (PDF), p. 587

Values are truncated at +/- 50%. The signal is smoothed using an EWMA with a half-life of 24 months.  Gross Profitability is given by the revenues minus the cost of goods sold, all divided by total assets, where all 3 quantities are all greater than 0.

— Stoxx Index Guide (PDF), p. 587

Values are truncated at +/- 50%. The signal is smoothed using an EWMA with a half-life of 24 months. • Gross Profitability is given by the revenues minus the cost of goods sold, all divided by total assets, where all 3 quantities are all greater than 0.

— Istoxx Index Guide (PDF), p. 919

nitions is substantially largerfor quality,’ according to a 2016 study.3The paper’s authors found that definitions range from low levels of accruals, gross profitability and low investments to bottom-line profitability measures such as return-on-equity and margins. Behind the iSTOXX Europe Quality Factor Index The iST

— The Quality Factor | Blog posts | STOXX

he difference between a stock’s performance on and immediately following an earnings announcement date). Quality The quality score is calculated from gross profitability, dilution, accruals and changes in net operating assets as well as environmental signals including carbon emissions intensity and science-based targe

— STOXX Equity Factor Indices | STOXX

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Gross Return

▰▰▰▰▰ 687

Quote

“What you keep after taxes and fees matters more than what you earn before them.”

— Anonymous

The total return of an index calculated assuming dividends are reinvested at the gross amount, before any withholding tax is deducted. This represents the theoretical maximum return for a tax-exempt investor.

Note

Gross return shows what you would earn if every dividend were reinvested in full with zero tax. It is the upper bound of performance and is used as the standard total return variant for many STOXX indices.

$${\text{Gross Return Index}}_t={\text{Gross Return Index}}_{t-1}\times \frac{{\sum }_i{w}_i\cdot p_{i,t}+{\sum }_i{w}_i\cdot d_{i,t}}{{\sum }_i{w}_i\cdot p_{i,t-1}}$$

Related terms

Net Return, Total Return, Dividend Yield

Source excerpts (5)

0 Index, which tracks companies with sizeable dividends but also applies a quality filter such as a history of stable payments, gained only 0.2% on a gross-return basis. The STOXX® Global Select 100 EUR Index, which is measured in euros, rose 1% during November.

— Monthly Index News November 2019 (PDF), p. 13

19, 2012 to Aug. 30, 2019 4 gr. div. yield is calculated as gr. return index return minus price index return (USD, gross return), all data as of Aug. 30, 2019 CONTACT DETAILS STOXX customer support P +41 43 430 7272 customersupport@stoxx.com www.stoxx.com STOXX is part of Deut

— Su5Zesgx (PDF), p. 2

The dark blue line represents the total return of the broader STOXX Global TMI universe. Figure 3 – Cumulative USD gross returns since March 19, 2012 Recent market turmoil Like many other technology and growth-focused benchmarks, the STOXX Global Metaverse was hit disproportio

— The Metaverse: investing at the new digital frontier | Blog posts | STOXX

f the Gross Return versions of the EURO STOXX Automobiles & Parts, EURO STOXX Banks and EURO A STOXX Oil & Gas Indices. N Index types and currencies: Gross Return in EUR Base values and dates: 1000 on Dec 29, 2000 K Dissemination calendar: STOXX Europe Calendar A INDEX FORMULA U The index is calculated as follo

— Istoxx Index Guide (PDF), p. 877

ESG Index – An ESG Version of the Iconic Blue-Chip Eurozone Index,’ STOXX Ltd., September 2019. 2 Inception refers to start of data in March 2012. 3 Gross returns in euros, Mar. 19, 2012-Sep. 20, 2019.

— Taking Stock of the EURO STOXX 50 ESG Index | Blog posts | STOXX

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I

Information Ratio

▰▰ 8

Quote

“The information ratio is the key measure of a portfolio manager’s skill.”

— Richard Grinold, Active Portfolio Management (1999)

The ratio of a portfolio’s active return to its tracking error. It measures the consistency with which a manager outperforms the benchmark per unit of active risk taken.

Note

The information ratio is the active manager’s report card: it tells you how much excess return they delivered for every unit of uncertainty they introduced by deviating from the benchmark. Higher is better.

$$\text{IR}=\frac{R_{\text{portfolio}}-R_{\text{benchmark}}}{{\sigma }_{\text{active}}}$$

Where ${\sigma }_{\text{active}}$ is the tracking error (standard deviation of active returns).

Related terms

Active Return, Tracking Error, Sharpe Ratio, Sortino Ratio

Source excerpts (5)

Prior to 2020, the outperformance was fairly steady (Figure 1). Realized tracking error was just over 8%, producing an information ratio of 0.15. While that information ratio may not sound dramatic, the strategy has delivered on its promise to provide better performance when the market

— Low Volatility Strategies: Why the Wheels Came Off (Temporarily) in 2020 | Bl…

The ESG Target index has provided the highest ESG score, but also has the highest tracking error (as well as lowest realized information ratio, fewest holdings and highest stock concentration). Although higher than that of the benchmark, the ESG Broad Market’s ESG score is the lowest among t

— Three Different Flavors for a Sustainable US Equity Portfolio | Blog posts | …

In all but one of instances, the optimized indices beat the respective portfolios of the largest 100 stocks by market capitalization. In terms of Information Ratio, the backtested performance of the Optimal 100 compared to the Top 100 is even more impressive, since the tracking error for the Optimal 100 is rough

— New STOXX Optimal 100 indices offer optimized replication strategies on bench…

Moreover, the STOXX Europe 600 PAB Index shows a relatively low 2.4% realized tracking error, producing an information ratio of 1.2 compared to its benchmark index. Active risk and returns The STOXX Europe 600 PAB Index’s predicted active risk shot up in February this year,

— The STOXX Europe 600 Paris-Aligned Benchmark: Higher Returns, Lower Risk for …

In Europe the industry-neutral Multi-Factor index also produced the highest information ratio, although in the US that honor went to both momentum portfolios. Factor clarity To help investors visualize factor exposures and target benchmark tra

— Introducing the STOXX Industry Neutral Ax Factor Indices | Blog posts | STOXX

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iNAV (Intraday Net Asset Value)

▰ 1

The estimated per-share value of an exchange-traded fund (ETF) or index fund calculated and disseminated continuously throughout the trading day, based on the real-time prices of the fund’s underlying holdings.

Note

iNAV gives traders a live fair-value estimate of an ETF so they can judge whether the market price represents a premium or discount. STOXX calculates iNAV for numerous ETFs tracking its indices.

$${\text{iNAV}}_t=\frac{{\sum }_{i=1}^N(n_i\times p_{i,t})+{\text{Cash}}_t}{\text{Shares Outstanding}}$$

Where $n_i$ is the number of shares of constituent $i$ and $p_{i,t}$ is its price at time $t$.

Related terms

Total Return, Gross Return, Net Return

Source excerpts (1)

ustments due to corporate actions » The DAX Strategy Index Guide contains the formulas and description of all DAX strategy indices » The Guide to the iNAV Calculation contains details on the calculation of indicative net asset values (iNAV) GUIDE TO INDUSTRY CLASSIFICATIONS USED BY STOXX LTD.

— Guide To Industry Classifications Used By Stoxx Ltd (PDF), p. 4

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M

Maximum Drawdown

▰ 5

Quote

“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”

— Warren Buffett

The largest peak-to-trough decline observed over a specified time period. It quantifies the worst-case loss scenario an investor would have experienced.

Note

Maximum drawdown is the single scariest number in a fund’s history: the worst cumulative loss from a peak before a recovery. It matters because investors feel losses more acutely than equivalent gains.

$$\text{MDD}=\underset{t\in [0,T]}{\max }\left[\frac{V_{\text{peak}}(t)-V_{\text{trough}}(t)}{V_{\text{peak}}(t)}\right]$$

Related terms

Drawdown, Value at Risk (VaR), Volatility, Sortino Ratio

Source excerpts (5)

In this same period, QLTY’s Index has also benefitted from significantly lower drawdowns, with a maximum drawdown approximately half of that experienced by the MSCI World Index.

— BetaShares launches Global Quality Leaders ETF - ETF Express

19 There have been three bear markets, other than this latest one, for the STOXX Europe 600 Index since 2000. The maximum drawdown during each one was reached, respectively, in March 2003 (-52.8%), March 2009 (-58.4%) and February 2016 (-24.9%).2 Stocks plunged on Mar.

— European Stocks Enter Bear Market | Blog posts | STOXX

Data show that the exclusions increased volatility relative to the benchmark, although did so only marginally. The Sharpe ratio and maximum drawdowns for the benchmark, ESG-X index and individual exclusions were broadly in line. We invite you to read more about the STOXX USA 500 ESG-X Index’s meth

— New Study: Gauging the Effect of ESG Exclusions Through the STOXX USA 500 ESG…

These results align with the thinking that sustainable companies are inherently less risky, a claim that’s also supported by a narrower maximum drawdown for the SRI index.” Table 2 – Risk and returns You have both explained how clients’ ESG needs are shaping product development.

— Q&A with State Street and Qontigo: ESG ETFs evolving alongside investors’…

be the least volatile index among the three, both in terms of realized annualized volatility (as measured by standard deviation of daily returns) and maximum drawdown. Figure 3 – Risk and return characteristics Turning now to the SRI indices’ by-design benefits, we look at the STOXX Europe 600 SRI’s record in lower

— STOXX SRI Indices: Target the Best ESG and Emissions Performers | Blog posts …

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Momentum (Price Momentum)

▰▰▰▰▰ 687

Quote

“The trend is your friend until the end when it bends.”

— Ed Seykota

The tendency of securities that have performed well (poorly) over a recent period to continue performing well (poorly) in the near future. In index construction, momentum is typically measured as the total return over the past 6 to 12 months, often excluding the most recent month.

Note

Momentum captures the market’s tendency to trend. STOXX momentum indices select stocks with the strongest recent price performance, betting that winners keep winning for a while.

$${\text{Momentum}}_i=\frac{P_{i,t-1}}{P_{i,t-12}}-1$$

Commonly using a 12-month lookback with a 1-month skip.

Related terms

Factor Exposure, Factor Return, Realized Volatility

Source excerpts (5)

Style risk is the aggregate risk of the style factors in the EU4 model (e.g., Momentum, Value etc.). 5 The diversification ratio of a portfolio is defined as the ratio of the weighted average of the total risk forecasts for the assets i

— When 40 is the New 30 – What DAX Gains Following Enlargement | Blog posts | S…

Performance is measured using the 12 most recent trailing quarters (16 for momentum metrics) as of ISS’ quarterly data download. Data is derived from company-reported income statement, balance sheet, and footnote financial data, whic

— Pay For Performance Mechanics (PDF), p. 7

MUTB Momentum Indices select companies based on a momentum score factor which is adjusted to account for market beta, size and book-to-price biases. Momentum is defined as the price movement over the prior 12 months. Universe: The indices are derived from their parent indices as described below.

— Istoxx Index Guide (PDF), p. 264

The FPA generally utilizes four equally-weighted EVA-based metrics: ▪ EVA Margin ▪ EVA Spread ▪ EVA Momentum vs. Sales ▪ EVA Momentum vs. Capital Financial performance for these EVA metrics is measured across a three-year period (or a shortened two-year peri

— Canada Executive Compensation Faq (PDF), p. 10

Various scenarios of director overboarding were evaluated against Economic Value Added’s (EVA) Margin & Momentum, ISS’ proprietary measures; and a correlation was found between overboarding and economic under performance.

— Public Fund Us Policy Updates (PDF), p. 5

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N

Net Return

▰▰▰▰▰ 447

Quote

“It is not what you earn but what you keep that determines your wealth.”

— Anonymous

The total return of an index calculated by reinvesting dividends after deducting the maximum applicable withholding tax rate for non-resident institutional investors. It provides a more realistic return measure for cross-border investors.

Note

Net return is the after-tax version of total return. It reflects what a foreign institutional investor would actually receive after dividend withholding taxes are taken, making it the most commonly benchmarked return variant.

$${\text{Net Return Index}}_t={\text{Net Return Index}}_{t-1}\times \frac{{\sum }_i{w}_i\cdot p_{i,t}+{\sum }_i{w}_i\cdot d_{i,t}\cdot (1-{\tau }_i)}{{\sum }_i{w}_i\cdot p_{i,t-1}}$$

Where ${\tau }_i$ is the applicable withholding tax rate for constituent $i$.

Related terms

Gross Return, Total Return, Dividend Yield

Source excerpts (5)

ULA Two versions of the indices are available, Total Return and Price. Total Return The Total Return version of the index combines the EURO STOXX 50 (Net Return) Index and a EURO STOXX 50 call option. On regular trading days the Total Return version is calculated as follows: ESTX50(NR) [ 𝑡 ⋅ESTX50(𝑃) ]−𝐶 ESTX

— Stoxx Strategy Guide (PDF), p. 12

Fixed day count convention). Consequently, due to the percentage of performance being subtracted, the decrement index is underperforming the standard net return index. The Underlying Index is the iStoxx Europe Origin 100 Equal Weight Net Return Index. DEFINITIONS Base value: 100 Base date: 24 September 2007 U

— Istoxx Index Guide (PDF), p. 99

orms for example in terms of component selection, weighting schemes and personalized calculation methodologies. 3 Net dividend yield is calculated as net return index return minus price index return 4 STOXX data from Jun. 20, 2011 to Aug. 31, 2023 (USD, net return), all data as of Aug.

— Ixarobu (PDF), p. 2

investments as long as the overall net dividend yield of the base index is greater than the value being subtracted. The base index is the DAX 50 ESG Net Return Index. Base value and dates: 1000 on September 24, 2012. 8.1.2. CALCULATION The index is calculated as follows: U ACT(t−1,t) t IV =IV × ( −D ) t t−1

— Dax Strategy Index Guide (PDF), p. 32

Events. Net Return Shall mean an Index in which dividend payments are fully reinvested, calculated with a dividend minus STOXX Withholding Index Tax. Net Return Indices are labelled accordingly in the Vendor Code Sheet. Price Index Shall mean an Index which measures the price(s) of constituents and where divi

— Stoxx Equity Index Family Benchmark Statement (PDF), p. 16

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Net Income

▰▰▰▰ 73

The total profit of a company after all expenses, taxes, interest, and depreciation have been subtracted from revenue. It is the “bottom line” of the income statement and the starting point for EPS calculation.

Note

Net income is the final profit number that flows to shareholders. While not as clean as EVA or free cash flow for analytical purposes, it remains the most widely reported profitability metric and anchors the P/E ratio.

$$\text{Net Income}=\text{Revenue}-\text{COGS}-\text{Operating Expenses}-\text{Interest}-\text{Taxes}$$

Related terms

Earnings Per Share (EPS), Revenue, EBITDA, Return on Equity (ROE)

Source excerpts (5)

The ROA is calculated as the net income before extraordinary items divided by total assets net income before extraordinary items ROA = t0 t0 total assets t0 - CFO ratio greater than or equal to zero.

— Istoxx Index Guide (PDF), p. 75

Compensation Policies March 28, 2014 - 9 - Transparency. Inclusiveness. Global Expertise. 14. Why is the CEO pay as percent of company’s net income showing NA? If a company’s net income is zero or negative, the CEO pay as percent of a company’s net income will be NA. Management Say on Pay (MSOP)

— Issuscompensationfaqs03282014 (PDF), p. 10

All of the stocks on the selection list are ranked separately in terms of free-float market capitalization, gross revenue, and net income. The final ranking is calculated by weighting the free-float market capitalization rank at 60%, the gross revenue rank at 20% and the net income rank

— Stoxx Index Guide (PDF), p. 94

option is harmful to shareholder value. Allocation of Income Brazilian companies are generally required to distribute at least 25 percent of adjusted net income as dividends to shareholders. Brazilian law also considers interest-on-capital-stock payments as dividends. General Recommendation: Vote for approval

— Brazil Voting Guidelines (PDF), p. 4

9 10. How does Compustat calculate a company’s TSRs and financial/operational measures? … 9 11. Why does CEO pay as percent of revenue or net income show as “N/A”? … 9 MANAGEMENT SAY-ON-PAY (MSOP) AND ISS’ EXECUTIVE PAY EVALUATION…

— 1 U.S. Executive Compensation Policies Faq Dec 2016 (PDF), p. 2

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Operating Margin

▰ 1

The ratio of operating income (revenue minus operating expenses) to revenue, expressed as a percentage. It measures the proportion of revenue left after covering the costs of production and day-to-day operations, but before interest and taxes.

Note

Operating margin isolates the profitability of the core business, stripping away financing and tax effects. It is one of the key quality metrics used in STOXX factor index construction and ISS governance screening.

$$\text{Operating Margin}=\frac{\text{Operating Income}}{\text{Revenue}}\times 100\%$$

Related terms

Gross Margin, EBITDA, Net Income, EVA Margin

Source excerpts (1)

s than or equal to 5%7. number of shares outstanding 1YΔNBO = t0 −1 t0 number of shares outstanding t−1 - Positive or zero 1-year growth in the Gross Operating Margin (1YΔGOM). The GOM is calculated as the ratio of Gross Incomes to Sales. gross income GOM = t0 t0 sales t0 1YΔGOM =GOM −GOM t0 t0 t−1 - Positive or ze

— Istoxx Index Guide (PDF), p. 76

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P

PEG Ratio

▰ 2

Quote

“Growth at a reasonable price is the investor’s holy grail.”

— Peter Lynch (paraphrased), One Up on Wall Street (1989)

The price-to-earnings ratio divided by the expected earnings growth rate. It adjusts the P/E ratio for growth, helping investors determine whether a stock’s valuation is justified by its earnings growth trajectory.

Note

PEG attempts to answer a question P/E alone cannot: “Is this high-P/E stock expensive, or is it just growing fast?” A PEG of 1.0 is often cited as fair value; below 1.0 suggests the stock may be undervalued relative to its growth.

$$\text{PEG}=\frac{\text{P/E Ratio}}{\text{Annual EPS Growth Rate (\%)}}$$

Related terms

Price-to-Earnings Ratio, Earnings Per Share (EPS), Earnings Yield

Source excerpts (1)

rt suggested using the price/earnings-to-growth (PEG) ratio instead, which combines a company’s P/E ratio with its expected earnings growth rate. The PEG ratio is calculated by dividing P/E by the annual earnings-per-share (EPS) growth rate, thereby accounting for how quickly earnings are growing and providi

— Europe defense, AI take center stage at Deutsche Börse’s ETF Forum event amid…

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Price-to-Earnings Ratio

▰ 2

Quote

“The intelligent investor should recognize that market prices reflect a price-earnings ratio, and the question is whether that ratio is justified by the company’s prospects.”

— Benjamin Graham, The Intelligent Investor (1949)

The ratio of a company’s current share price to its earnings per share (EPS). It indicates how much investors are willing to pay for each unit of earnings and is a primary valuation metric in STOXX value and growth index classification.

Note

P/E is the most widely quoted valuation metric. A high P/E suggests investors expect strong future growth; a low P/E may indicate undervaluation or declining prospects.

$$\text{P/E}=\frac{\text{Price per Share}}{\text{Earnings per Share}}$$

Related terms

Earnings Yield, Book-to-Price Ratio, Cash Flow Yield, Dividend Yield

Source excerpts (2)

Data as of March 31st, 2025. FORWARD PRICE-TO-EARNINGS (P/E) Valuation of European A forward Price-to-Earnings ratio shows Equities Is Low how a company’s current stock price compares to the profits it’s expected to Compared to make per share in the next year. A low

— Stoxx Infographic Stoxxeurope600 (PDF), p. 1

n nonetheless tap those profits at lower relative prices, following years of underperformance. The STOXX Europe 600 Banks index has the second-lowest price-to-earnings ratio among the 20 STOXX Europe 600 sector indices.[2] The Banks index has the highest dividend yield: its 8.7% payout compares with the average 3.2% for a

— Sector watch: Europe bank stocks lead gains in 2024, have best year since 202…

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R

Realized Volatility

▰▰▰ 24

Quote

“Volatility is the price of admission for long-term returns.”

— Nick Murray, Simple Wealth, Inevitable Wealth (1999)

The actual historical volatility of an asset or index, computed as the standard deviation of returns over a past observation window. It is distinguished from implied volatility, which is forward-looking and derived from options prices.

Note

Realized volatility looks backward to measure how bumpy the ride actually was. STOXX uses it to construct minimum-variance and low-volatility indices that favour calmer stocks.

$${\sigma }_{\text{realized}}=\sqrt{\frac{252}{n-1}\sum _{t=1}^n{\left(r_t-\bar{r}\right)}^2}$$

Where $r_t$ are daily log returns and 252 is the standard annualization factor.

Related terms

Volatility, Standard Deviation, Beta, Value at Risk (VaR)

Source excerpts (5)

60. Where: 𝑇𝑔𝑡𝑉𝑜𝑙 = The pre-determined Target Volatility (10%). And: 𝑀𝑎𝑥𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑𝑉𝑜𝑙 = max (𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑𝑉𝑜𝑙 ,𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑𝑉𝑜𝑙 ) 𝑡,(20,60) 20 60 And finally the Realized Volatility is calculated as: 252 𝐼𝐷𝑋 2 𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑉𝑜𝑙 =√ ∙∑(ln( 𝑠 )) 𝑡,𝑛 𝑛 𝐼𝐷𝑋 𝑠−1 𝑠 Where: 𝑛 = 19 or 59. 𝑠 = Ranging from t to t-18 or t to t-58. Determination o

— Stoxx Strategy Guide (PDF), p. 90

TILITY-BALANCED INDEX Quick facts Methodology Weighting 97.5%/90%/70% To capture the anticipated changes in the volatility environment, the one-month realized volatility and the value of one-month implied Cap factor 2.5%/10%/30% volatility (VSTOXX) one-month back are observed.

— Sx5Evbt (PDF), p. 2

2 𝜎𝑁 = √ × ∑𝑟 2 𝑡 𝑁 𝑡−𝑘−𝐿𝑎𝑔 𝑘=0 85 Before inception date of the history of the underlying index its daily returns are defined as 𝑟 = 𝑡 𝜎𝑇𝑉 implying a realized volatility of 𝜎 and hence an initial allocation to the index of 100% 𝑇𝑉 √252 iSTOXX® METHODOLOGY GUIDE 539/1024 61.

— Istoxx Index Guide (PDF), p. 538

, which provides unique insights into risk trends. For all of 2022 and into 2023, the STOXX® Emerging Markets 1500 index has shown lower forecast and realized volatility than the STOXX® Global 1800, a benchmark for developed economies (DMs).

— Why have emerging markets become less risky than their developed counterparts…

X 50 Realized Dispersion Index is designed to mirror such a trading strategy, and does so by calculating how much the flagship EURO STOXX 50® Index’s realized volatility deviates from that of its constituents. More precisely, the dispersion index measures the difference between the market-cap weighted sum of EURO STOX

— An Index Solution for Dispersion Trading | Blog posts | STOXX

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Return on Assets (ROA)

▰▰ 13

The ratio of net income to total assets, measuring how efficiently a company uses its entire asset base to generate profit. It is a key profitability metric in quality factor screening.

Note

ROA answers: “For every dollar of assets the company controls, how many cents of profit does it produce?” It penalises asset-heavy businesses and rewards capital-light models, making it a useful complement to ROE.

$$\text{ROA}=\frac{\text{Net Income}}{\text{Total Assets}}\times 100\%$$

Related terms

Return on Equity (ROE), Net Income, Gross Profitability

Source excerpts (5)

heet Risk Score are calculated as following. The quality score is defined as the number of criteria that a company meets and can range from 0 to 9: - Return On Assets (ROA) greater than or equal to zero. The ROA is calculated as the net income before extraordinary items divided by total assets net income before extraordi

— Istoxx Index Guide (PDF), p. 75

Profitability Leaders: o Companies must rank in the top 25% of their group in Gross Margin or, o Companies must rank in the top 25% of their group in Return on Assets (ROA) or, o Companies with a Gross Margin greater than or equal to 50%. 3.2. Profitability Growers: o Companies must rank in the top 25% of their group2 on

— Stoxx Index Guide (PDF), p. 523

The potential metrics are: › Cash flow (from operations) growth › EBITDA growth › Return on assets (ROA) › Return on equity (ROE) › Return on invested capital (ROIC) › Revenue growth › Total shareholder return (TSR) The metrics and weightings will vary b

— 2017 Canadian Compensation Faq (PDF), p. 9

However, controlled companies outperformed non-controlled firms with respect to return on assets. Results for returns on invested capital were mixed: controlled companies outperformed marginally (by less than a percentage point) for most time per

— Controlled Companies Generally Underperform And Boards Less Diverse, New Stud…

ethodology to use Economic Value Added (EVA) metrics in place of unadjusted GAAP metrics. “EVA Spread,” “EVA Margin,” and “EVA Momentum” will replace Return on Assets (ROA), Return on Equity (ROE), Return on Invested Capital (ROIC), Earnings Before Interest, Tax, Depreciation, and Amortization (EBITDA) growth, and cash f

— 20181101 Pearl Meyer (PDF), p. 1

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Return on Equity (ROE)

▰▰▰▰ 63

Quote

“A truly great business must have an enduring moat that protects excellent returns on invested capital.”

— Warren Buffett

The ratio of net income to shareholders’ equity, measuring how effectively a company generates profit from the money shareholders have invested. It is one of the most watched profitability metrics in equity analysis.

Note

ROE tells you the return earned on the owners’ stake in the business. High ROE can signal a competitive advantage, but it can also be inflated by excessive leverage, so it should be read alongside the debt-to-equity ratio.

$$\text{ROE}=\frac{\text{Net Income}}{\text{Shareholders’ Equity}}\times 100\%$$

Related terms

Return on Assets (ROA), Debt-to-Equity Ratio, Net Income, Earnings Per Share (EPS)

Source excerpts (5)

Therefore, the qualitative assessment of the company’s pay for performance alignment may consider other measures of company performance such as Return on Equity, Return on Invested Capital, and other relevant metrics. Hence, ISS does not advocate that companies use TSR as the metric underlying their incentive

— Canada Executive Compensation Faq Dec 2015 (PDF), p. 10

ICES (PERFORMANCE DEDUCTIONS) 1+v(t), v(t) > 0 i i V(t) = { 1 i , else 1−v(t) i V(t) wV(t) = i i ∑V(t) i A Quality sub-score, wQ(t), where ROE is the Return on Equity: i q(t) = (ROE(t−1)−R̅̅O̅̅E̅(̅t̅̅−̅̅1̅̅)) i 1+q(t), q(t) > 0 i i Q(t) = { 1 i , else 1−q(t) i Q(t) w Q (t) = i i ∑Q (t) i where, i constituent of the

— Istoxx Index Guide (PDF), p. 84

6 ISS | Institutional Shareholder Services 7 of 13 2017 Japan Proxy Voting Guidelines › Balance sheet conditions; › Ccapital efficiency and return on equity; › Past share buybacks and dividend payouts; › Board composition; › Shareholding structure; and › Other relevant factors. Generally vote against thes

— 2017 Japan Voting Guidelines (PDF), p. 8

The potential metrics are: › Cash flow (from operations) growth › EBITDA growth › Return on assets (ROA) › Return on equity (ROE) › Return on invested capital (ROIC) › Revenue growth › Total shareholder return (TSR) The metrics and weightings will vary by GICS industry group and

— 2017 Canadian Compensation Faq (PDF), p. 9

In order for equity awards to be considered performance-conditioned, the company should disclose the details of the performance metric(s) (e.g., return on equity) and the associated goals (e.g., 15 percent) associated with the performance awards at the time they are made.

— Us Executive Compensation Policies Faq 16 March 2016 (PDF), p. 17

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Revenue

▰▰▰▰▰▰ 3,843

Quote

“Nothing happens until someone sells something.”

— Peter Drucker (attributed), The Practice of Management (1954)

The total amount of income generated by the sale of goods or services related to a company’s primary operations, before any expenses are deducted. Also referred to as “top line” or “sales.”

Note

Revenue is the starting point of every profitability calculation. While it says nothing about whether the company is profitable, sustained revenue growth is a prerequisite for long-term value creation and is a key input to STOXX growth factor screens.

Revenue is reported as an absolute currency figure and does not have a ratio formula per se. Growth is commonly expressed as:

$$\text{Revenue Growth}=\frac{{\text{Revenue}}_t-{\text{Revenue}}_{t-1}}{{\text{Revenue}}_{t-1}}\times 100\%$$

Related terms

Net Income, Gross Margin, Operating Margin, EBITDA

Source excerpts (5)

Figure 4 shows the performance of stocks in the index methodology’s three revenue tiers. Through Aug. 1, 2025, the high military revenues basket rose 102% this year, compared with 73% for the medium tier and 26% for the group of co

— European defense stocks: A look at purity through military revenues’ exposure…

Existing constituents in the Domestic Index should have 45% or more domestic revenue to remain in the Domestic Index85. Domestic Revenue is defined as revenue generated within Japan, which is the region represented by the parent index, STOXX Japan Universal Index86. 2.

— Stoxx Index Guide (PDF), p. 566

Global revenue from the sale of artificial intelligence (AI) software may grow to $106billionby2025,from$5.4 billion in 2017, according to a new report1 from T

— Global AI Revenue Seen Growing Twentyfold by 2025 | Blog posts | STOXX

Summary Compensation Table. viii If the company makes or receives annual payments exceeding the greater of $200,000 or 5 percent of recipient’s gross revenues (the recipient is the party receiving proceeds from the transaction). ix “Material” is defined as a standard of relationship (financial, personal or

— 2015Canadaventurevotingguidelines (PDF), p. 8

y granular and accurate sector and industry classification (up to 1,500 distinct sub-industries identified) allows a detailed breakdown of companies’ revenue sources, helping to identify and select businesses with substantial exposure to specific themes. Key benefits Broad universe Thematic portfolios are

— Revenue-Based Thematic Indices | STOXX

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Risk-Adjusted Return

▰▰▰ 35

Quote

“The essence of investment management is the management of risks, not the management of returns.”

— Benjamin Graham, The Intelligent Investor (1949)

A return metric that accounts for the amount of risk taken to achieve it. Common expressions include the Sharpe ratio, Sortino ratio, and information ratio.

Note

Raw returns can be misleading if one fund took enormous risk to achieve them. Risk-adjusted return normalizes performance by the volatility or downside risk endured, enabling fair comparisons.

$$\text{Risk-Adjusted Return}=\frac{R_p-R_f}{{\sigma }_p}$$

This is the general form (Sharpe ratio). Alternative specifications replace ${\sigma }_p$ with downside deviation (Sortino) or tracking error (Information ratio).

Related terms

Sharpe Ratio, Sortino Ratio, Information Ratio, Alpha

Source excerpts (5)

t is measured in terms of risk allocation.. STOXX LIMITED 9 STOXX MINIMUM VARIANCE INDICES 3 Why minimum variance portfolios provide better risk-adjusted returns MVPs tend to strongly outperform market capitalization weighted portfolios while reducing risk in the long term.

— Stoxx Minvar Paper (PDF), p. 9

ry and March this year persist, a performance analysis of the AI indices would be warranted to understand the drivers and factors behind the returns. Risk-adjusted returns Yet absolute returns show only part of the story. Qontigo’s three AI indices have been designed to offer investors two different approaches to stock

— Artificial Intelligence Theme Gets Investors’ Attention | STOXX

The index’s composition methodology then filters for stocks with high dividend yield and low volatility, factors that traditionally result in better risk-adjusted returns. The strategy is particularly attractive for issuers of structured products (SPs), as the high dividend yield/low volatility of the underlying lower

— ESG Index Geared to Structured Products | Blog posts | STOXX

eans, for a similar level of performance, we don’t have to lean into any one factor as much. This means that, for a core exposure, we can improve our risk-adjusted returns. There are also operational benefits for the investor with an integrated solution at the core of the portfolio, in limiting overhead in rebalancing

— BlackRock and STOXX collaboration: iShares multi-factor ETFs track STOXX indi…

Increased diversification limits idiosyncratic risks and improves long-term risk-adjusted returns. “The second driver of outperformance is the small-cap premium. The weight attributed to small caps is much higher in the Equal Weight version versu

— Ossiam’s Lacroix: Maximizing the benefits of an ESG index strategy with an eq…

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Risk-Free Rate

▰▰▰ 27

Quote

“There is no such thing as a risk-free investment, only a risk-free rate of return.”

— Anonymous

The theoretical rate of return on an investment with zero risk of financial loss, typically proxied by the yield on short-term government securities such as U.S. Treasury bills or German Bunds. It serves as the baseline against which all risky investments are measured.

Note

The risk-free rate is the anchor of modern portfolio theory. Every risk premium, every Sharpe ratio, and every CAPM calculation starts by subtracting this rate. In practice, it shifts with central bank policy and sovereign credit conditions.

The risk-free rate is observed from government bond yields rather than calculated from a formula. It is commonly denoted:

$$R_f\approx \text{Yield on short-term government bonds}$$

Related terms

Equity Risk Premium, Market Premium, Sharpe Ratio, Alpha

Source excerpts (5)

In addition, cash-settled futures on GC Pooling Deferred are already available and can facilitate the development of a risk-free rate term structure. Several possible outcomes of the market consultation are being considered.

— ECB Eyes Repo Market for Risk-Free Rate | Blog posts | STOXX

The dark blue line in Figure 1 shows the 5-year yield pickup of USD-denominated, single-A-rated bank bonds over risk-free rates since 2007, while the green line represents the average spread of all corporate securities with the same currency and credit quality. Figure 1 – Ave

— Bank credit spread contagion – how bad could it get? | Blog posts | STOXX

STOXX index futures contract into the 2nd nearby contract; the total return index, in addition, replicates the remuneration of the cash component at risk-free rate. The futures contracts series is not amended between roll dates. Rolling period refers to the length of transition from the 1st nearby futures contra

— Stoxx Strategy Guide (PDF), p. 67

For example, if the option has a 10-year R Risk Free Rate Treasury term, the risk-free rate is the 10-year U.S. Government Bond Yield website on the date of grant. Term/Expected T Proxy Full term of the option. Life Base of Natural e N/A N/A

— Us Compensation Policies Faq (PDF), p. 6

Level, we need to borrow the cash amount corresponding to the current value of the Option Portfolio, which is equal to 𝑂𝑃𝐿𝑀𝑇𝑀 times the de-annualized risk-free rate used 𝑡−1 for borrowing. In formula: 𝑆𝐺𝐶𝑃𝑂𝑁 𝐴𝑐𝑡(𝑡−1,𝑡) ∆𝑂𝑃𝐿 = 𝑂𝑃𝐿 − 𝑂𝑃𝐿 −𝑂𝑃𝐿𝑀𝑇𝑀∗ 𝑡−1 ∗ 𝑡 𝑡 𝑡−1 𝑡−1 100 360 Where o 𝑆𝐺𝐶𝑃𝑂𝑁 is the STOXX GC Pooling EUR

— Istoxx Index Guide (PDF), p. 411

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Sharpe Ratio

▰▰▰▰ 60

Quote

“The reward-to-variability ratio provides a single measure combining both risk and return.”

— William Sharpe

The ratio of a portfolio’s excess return over the risk-free rate to its total standard deviation. Developed by William Sharpe, it is the most widely used measure of risk-adjusted performance.

Note

The Sharpe ratio asks: “For every unit of total volatility I endured, how much extra return did I get beyond the risk-free rate?” Values above 1.0 are generally considered good; above 2.0, excellent.

$$S=\frac{R_p-R_f}{{\sigma }_p}$$

Related terms

Sortino Ratio, Information Ratio, Standard Deviation, Risk-Adjusted Return

Source excerpts (5)

es (the best 50 /100 stocks by gross dividend yield) on the selection list. If more than 50 (100) stock pass the initial screening for each stock the Sharpe Ratio is calculated as following and all stocks are ranked according to their Sharpe Ratio value: (1(cid:1851) (cid:1870)(cid:1857)(cid:1872)(cid:1873)(cid

— Stoxx Index Guide (PDF), p. 306

The function to be optimized is as follows: 𝑟 −𝑟 𝑝 𝑓 𝑠𝑟 = 𝑝 𝜎 𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 The Sharpe ratio is the difference between a portfolio’s return and the risk-free return, divided by the portfolio’s standard deviation. 𝑟 =𝜋 ⋅𝑥 +⋯+𝜋 ⋅𝑥 𝑝 1 1 𝑛 𝑛 𝑆ℎ𝑎

— Dax Equity Index Methodology Guide 5526498614 (PDF), p. 80

The EURO iSTOXX Equal Industry 50 EW Index is a good example of such strategies. Featured products 1 Net returns in euros. 2 Sharpe ratios calculated using EONIA.

— An Equal-Weighted Industries Strategy | Blog posts | STOXX

2, 2004 to Feb. 27, 2015 for USD Gross Return versions. An interest rate of 0% is used to calculate the Sharpe ratios. This exercise exemplifies that an equity MVP can be used to double equity allocation while keeping risk constant and significantly improving return

— Stoxx Minvar Paper (PDF), p. 26

Using volatility, return and correlation assumptions, we shade where the Sharpe ratio is the highest, indicated by the darkest red. We show scenarios varying the stock/bond correlation from -0.5, as an investor only aware of the last t

— Charting innovation: digital asset edition | New index launches | Blog posts …

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Standard Deviation

▰▰▰▰▰ 300

Quote

“Diversification is both observed and sensible; a rule of behavior which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim.”

— Harry Markowitz, Portfolio Selection (1952)

A statistical measure of the dispersion of returns around their mean. In finance, it serves as the primary measure of total risk (volatility).

Note

Standard deviation tells you how spread out an investment’s returns are. A higher standard deviation means wider swings in value and therefore greater uncertainty about future outcomes.

$$\sigma =\sqrt{\frac{1}{n-1}\sum _{t=1}^n(r_t-\bar{r}{)}^2}$$

Related terms

Volatility, Realized Volatility, Sharpe Ratio, Tracking Error

Source excerpts (5)

For each single stock, the mean realized cash dividend over the preceding 5 years plus 2.5 standard deviations is calculated. This is taken as the fixed decrement amount assuming it doesn’t exceed the upper cap limit, which is defined as the mean of the annua

— Istoxx Index Guide (PDF), p. 167

Long-term risk uses weekly returns over five years with a one-year half-life. Standard Deviation (Standalone) is the volatility of the bucket independent of the overall portfolio. Standard Deviation (Weighted) is standalone volatility multiplied

— Axioma Multi Asset Class Risk Monitor (PDF), p. 5

30, 2025. 1 Real Estate Investment Trusts. 2 For current components, the thresholds are lowered to 35% and at least 1.5 standard deviation above the sector peer average, respectively. Revere Revenue dataset allows detailed breakdown of the revenue sources of the eligible companies. Copyr

— Monthly Index News September 2025 (PDF), p. 4

50® options traded at Eurex to measure the 30-day implied volatility. and there are two approaches to estimate it: 1) Historical Volatility: Benefits standard deviation of close prices from stocks or indices The VSTOXX® index measures the implied variance across all options of a given over a given period of time time

— Vstoxx The European Volatility Gauge 202504 (PDF), p. 2

(cid:2919)(cid:2930) x = Carbon Intensity value for company (i) at time (t) (cid:2919)(cid:2930) X(cid:3365) = Mean of the population (cid:2926) S = Standard Deviation of the population (cid:2926) Step 2: Free-float market capitalization percentage weight (as per usual STOXX calculation methodology) multiplied with

— Stoxx Index Guide (PDF), p. 154

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Spread (Credit)

▰▰▰▰▰ 752

Quote

“The spread tells you the market’s level of fear.”

— Anonymous

The difference in yield between a corporate bond (or other credit instrument) and a risk-free government bond of comparable maturity. It compensates the investor for default risk, liquidity risk, and other credit-related uncertainties.

Note

Credit spread is the market’s real-time verdict on a borrower’s riskiness. When spreads widen, investors are demanding more compensation for the perceived risk of default; when they tighten, confidence is rising.

$$\text{Credit Spread}=Y_{\text{corporate}}-Y_{\text{risk-free}}$$

Typically expressed in basis points.

Related terms

Basis Point, Yield Curve, Duration (Bond), Risk-Free Rate

Source excerpts (5)

The FPA generally utilizes four equally-weighted EVA-based metrics: ▪ EVA Margin ▪ EVA Spread ▪ EVA Momentum vs. Sales ▪ EVA Momentum vs. Capital Financial performance for these EVA metrics is measured across a three-year period (or a shortene

— Canada Executive Compensation Faq (PDF), p. 10

Taft-Hartley Advisory Services may support article amendments allowing companies to hold virtual only meetings only in unusual situations such as the spread of an infectious disease or the occurrence of a natural disaster. 1 The term “hybrid shareholder meeting” refers to an in-person, or physical, meetin

— Taft Hartley International Policy Updates (PDF), p. 3

Africa Proxy Voting Guidelines - 6 - Transparency. Inclusiveness. Global Expertise.  Represents customer, supplier, creditor, banker, or other entity with which company maintains transactional/commercial relationship (unless company discloses information to apply a materi

— 2014Issafricaguidelines (PDF), p. 7

This is one of the biggest benefits of Leverage Shares ETPs versus certain alternatives like CFDs and spread betting.” Figure 1 – Listed Leverage Shares ETPs tracking STOXX indices 1 FAANG refers to Facebook, Amazon, Alphabet, Netflix and Apple shares.

— Q&A: Leverage Shares’ Kavrak on Single-Stock Short and Leveraged ETPs | B…

Exceptions beyond this 5 percent will prevent a company from receiving credit on this factor. No points are awarded if the minimum vesting requirement does not apply to all equity award types, or if the plan allows for individu

— 1 U.S. Equity Compensation Plans Faq Dec 2016 (PDF), p. 25

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T

Total Return

▰▰▰▰▰ 334

Quote

“Never count just the dividends or just the price. Count everything.”

— Anonymous

The complete return on an investment including both price appreciation and income from dividends or interest, assuming all distributions are reinvested. STOXX publishes total return indices in both gross and net variants.

Note

Total return captures the full picture: not just whether the stock price went up, but also the dividends you collected along the way. It is the only honest way to evaluate long-term investment performance.

$$R_{\text{total}}=\frac{P_t+D_t-P_{t-1}}{P_{t-1}}$$

Where $P_t$ is the price at time $t$ and $D_t$ is the dividend received.

Related terms

Gross Return, Net Return, Annualized Return, Dividend Yield

Source excerpts (5)

Basket TRFs at Eurex | Improved Capital Efficiency. For additional information on Index TRFs, please visit Index Total Return Futures | Eurex Listed Total Return Swaps.

— Eurex, STOXX expand Equity and Basket Total Return Futures collaboration with…

Last month, volume amounted to 2.5 times the monthly average of 2019. Figure 4 – Traded volume and open interest EURO STOXX 50 Total Return Futures TRFs provide cost-efficient access to the total returns of an underlying index whilst hedging the implied equity repo rate.

— Pandemic Fuels Trading in EURO STOXX 50 Dividend and Total Return Futures | B…

ZUG, Switzerland (September 30, 2024)— The STOXX Europe 600 has become the underlying index for Total Return Futures (TRF), launched today on the derivatives exchange Eurex. The broad pan-European benchmark complements the existing TRF-segment, with products

— STOXX Europe 600 ecosystem grows with new Total Return Futures | Press releas…

Select Dividend 30 indices. | Key benefits of listed TRFs Reduce balance sheet costs TRFs aim to cost-effectively replicate the payoff profile of OTC Total Return Swaps, creating a positive effect on capital requirements. Equity financing Use TRFs to hedge the implied equity repo rate.

— STOXX Europe 600 index underlies new Total Return Futures on Eurex | Blog pos…

than do price-return futures and therefore help users avoid dividend risk.” Who are the main users of TRFs? “Because TRFs are designed to reflect the total return of the index, they serve a different purpose than do traditional index futures.

— Q&A with Eurex’s Stuart Heath: STOXX Europe 600 total return futures | Bl…

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Tracking Error

▰▰▰▰▰ 501

Quote

“Tracking error is the fundamental measure of active risk — it tells you how far a portfolio dares to stray from its benchmark.”

— Richard Grinold & Ronald Kahn, Active Portfolio Management (1999)

The standard deviation of the difference between a portfolio’s returns and its benchmark’s returns. It measures the consistency of a portfolio’s deviation from its benchmark, also known as active risk.

Note

Tracking error quantifies how tightly a fund follows its benchmark. An index-tracking ETF should have near-zero tracking error; an active manager with high conviction will have a large one.

$$\text{TE}=\sigma (R_p-R_b)=\sqrt{\frac{1}{n-1}\sum _{t=1}^n[(R_{p,t}-R_{b,t})-\overline{(R_p-R_b)}{]}^2}$$

Related terms

Active Return, Information Ratio, Standard Deviation

Source excerpts (5)

This article provides a high-level refresher of what tracking error means, and how we can embed it directly into portfolio construction. When we design a benchmarked portfolio, every design choice that takes us away f

— Tracking Error 101: The Intuition Behind Measurement and Control | Whitepaper…

ESG score of a sustainable portfolio rises, the investment manager implements a bigger deviation in weights vs. the benchmark, and takes on a higher tracking error, in order to achieve their overarching objective. Figure 1 shows this pattern in the form of ESG score vs. realized tracking error.

— Tracking error: making sense of a key investment statistic | Blog posts | STOXX

)(cid:2911)(cid:2928) (cid:2886)(cid:2911)(cid:2929)(cid:2915) STOXX INDEX METHODOLOGY GUIDE 298/639 16. STOXX RISK BASED INDICES For the tracking error constrained version it is defined as: H ≥H ∙60% (cid:2897)(cid:2919)(cid:2924)(cid:2906)(cid:2911)(cid:2928) (cid:2886)(cid:2911)(cid:2929)(cid:2915)

— Stoxx Index Guide (PDF), p. 298

For much of 2022, tracking error has been above the 10-year median of 14% (Figure 9). After reaching a year-to-date peak in May, tracking error declined until last week, when it skyrocketed following the beating of FAANGs stocks on earnings announcements.

— From pandemic profiteers to stagflation hostages: FAANGs stranglehold weighs …

— the usage of constraints allows for the efficient management of these trade-offs. Here, we will examine the compromises and pay-offs of sector and tracking error (TE) constraints. Industry caps The STOXX Factor Indices embed a 5% active weight constraint on ICB Industries (Level 1), meaning the industry weight

— STOXX Factor Indices Q3 Spotlight – To Constrain or not to Constrain | Blog p…

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Turnover

▰▰▰▰▰ 668

Quote

“Costs eat returns the way termites eat wood: slowly, silently, and from within.”

— John C. Bogle (paraphrased), The Little Book of Common Sense Investing (2007)

In index methodology, the proportion of an index’s weight that changes at each rebalancing, reflecting the cost of maintaining the portfolio. It is typically expressed as one-way turnover (the sum of additions or deletions, not both).

Note

Turnover measures how much trading an index forces at each rebalance. Higher turnover means higher transaction costs and potential tax consequences for funds tracking the index.

$$\text{Turnover}=\frac{1}{2}\sum _{i=1}^N\left|w_{i,\text{new}}-w_{i,\text{old}}\right|$$

Related terms

Weighted Average, Tracking Error

Source excerpts (5)

Market participants will be notified of such changes in a timely manner. 4.4.2. TURNOVER RATIO The annualized turnover ratio is defined as the median value of the daily traded volume to the free- float shares ratio over the previous 12 mo

— Stoxx World Equity Index Guide (PDF), p. 17

Because today there is a high information decay – faster, real-time news becomes old news soon – the rate of turnover becomes a crucial component. The iSTOXX Factor indices have a monthly turnover limit of 25% of their constituents’ value, a marginal point under whic

— Evaluating the true cost of momentum investing | Blog posts | STOXX

r Because the EURO STOXX 50 ESG Index is reviewed and rebalanced every quarter, as opposed to annually as is the benchmark, the former sees increased turnover as the portfolio accommodates changes in weights and constituency. Venkataraman and Williams estimate that the rolling 12-month turnover for the ESG

— New Whitepaper Looks at Trading Characteristics of EURO STOXX 50 ESG Index | …

December 3, 2021. 1 Initial eligibility: minimum trading volume over the last 12 months of either EUR 1 billion at the Frankfurt Stock Exchange or a turnover rate of 20%. Continued eligibility: a minimum trading volume over the last 12 months of either at least EUR 0.8 billion or a turnover rate of 10%.

— DAX Index Grows to 40 Constituents – Looking at Impact on Market Cap and Liqu…

AVERAGE DAILY TRADED VALUE Average daily traded value refers to the average of the daily turnovers of a specific stock recorded over a defined period of time. The following applies to liquidity-weighted indices: All prices and traded quantities av

— Dax Equity Index Methodology Guide 5526498614 (PDF), p. 24

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V

Value at Risk (VaR)

▰▰▰ 45

Quote

“The problem with VaR is that it tells you nothing about what happens in the tail.”

— Nassim Nicholas Taleb, The Black Swan (2007)

The maximum expected loss of a portfolio over a specified time horizon at a given confidence level. For example, a one-day 95% VaR of $1 million means there is a 5% probability of losing more than $1 million in a single day.

Note

VaR puts a dollar figure on potential losses. It answers: “On 95 out of 100 days, I expect to lose no more than this amount.” It does not, however, tell you how bad things could get in the remaining 5 days.

$$P(L\le {\text{VaR}}_{\alpha })=\alpha$$

Under the parametric (normal) assumption:

$${\text{VaR}}_{\alpha }=\mu -z_{\alpha }\cdot \sigma$$

Where $z_{\alpha }$ is the z-score at confidence level $\alpha$.

Related terms

Maximum Drawdown, Volatility, Standard Deviation, Drawdown

Source excerpts (5)

Index The STOXX Willis Towers Watson Climate Transition Indices (CTIs) were introduced in October this year. They employ a unique Climate Transition Value at Risk (CTVaR) methodology that quantifies the anticipated impact of an economic transition on equity valuations.

— Monthly Index News November 2021 (PDF), p. 4

In other words, 3% of the starting global index is at risk from the transition to a net-zero economy. (Figure 1). Figure 1: Climate transition value at risk While not an explicit component of the methodology, the World CTI also looks better on other sustainability metrics.

— Climate Transition Indices – A risk profile analysis | Blog posts | STOXX

Our team of climate experts provide an overview of the concept of transition risk analysis, explain the methodology behind our new Climate Transition Value at Risk Solution and review the changes that have been made to the ISS ESG Climate Impact Report. Moderator: Joel Yarm, Head of Institutional Sales EMEA, ISS

— Financial Impact of Transition Risk and Opportunities | ISS

We believe that understanding this transition, through our Climate Transition Value at Risk methodology (CTVaR), should be one of the biggest sources of alpha across all asset classes over the next few years.

— Willis Towers Watson and Qontigo launch pioneering STOXX Global Index Series …

The difference between the two is what we view to be the financial risk for each company.” This is the premise behind WTW’s Climate Transition Value at Risk (CTVaR) measure, which quantifies the anticipated impact on equity and fixed-income valuations of moving to a world consistent with the goals of the

— WTW: Why it is key to manage a portfolio’s climate-transition risk beyond car…

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Volatility

▰▰▰▰▰▰ 2,756

Quote

“Uncertainty is the only certainty there is.”

— John Allen Paulos, A Mathematician Plays the Stock Market (2003)

A general term for the degree of variation in a trading price series over time. In quantitative finance, it is most commonly measured as the annualized standard deviation of returns.

Note

Volatility is the heartbeat of financial markets. Low volatility means calm, predictable price action; high volatility means wild swings. STOXX uses it to build minimum-variance and low-volatility indices.

$${\sigma }_{\text{ann}}={\sigma }_{\text{daily}}\times \sqrt{252}$$

Related terms

Realized Volatility, Standard Deviation, Beta, Value at Risk (VaR)

Source excerpts (5)

That means that a low-volatility portfolio may not necessarily be made up mostly of industries that are less cyclical. “Low-volatility stocks have low beta,” said Ung. “However, not all low-beta stocks have low volatility, and some higher-volatility stocks can be low beta.” Ung point

— Low Volatility’s Edge in Europe | Blog posts | STOXX

® Volatility of Volatility Index (V-VSTOXX) measures the implied volatility of options on VSTOXX futures, hence reflecting expectations regarding the volatility of volatility. Volatility strategy indices Qontigo’s volatility strategy indices also include the EURO STOXX 50® Investable Volatility Index, which m

— Dynamic Allocation to Volatility Reaps Record Benefit from COVID-19 Market Tu…

X, dissects their objectives, construction methodology, performance, and accessibility through passive investments. Venkataraman starts his review of volatility as an investable asset class by introducing equity volatility, both implied and realized, and its most defining features.

— Volatility – An Investable Asset Class | Blog posts | STOXX

As such, replacing a fixed hedge allocation with a systematic and flexible one can make a crucial difference for overall results. At the heart of the Volatility-Balanced index’s methodology and allocation model is a prevailing volatility environment indicator.

— August market turmoil highlights benefit of dynamic volatility allocation  | …

The paper is an excellent opportunity to get introduced to, or revisit, the VSTOXX and the concepts of volatility and volatility trading. Methodology The VSTOXX recreates at each calculation interval a portfolio of out-of-the-money options that represents the imp

— VSTOXX 101: Understanding Europe’s volatility benchmark | Blog posts | STOXX

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W

Weighted Average

▰▰▰▰ 165

Quote

“Not all things are created equal, nor should they be counted equally.”

— Anonymous

A calculation in which each constituent’s value is multiplied by its index weight before summation, producing an aggregate that reflects the relative importance of each component. Used extensively in index-level statistics such as weighted-average P/E, dividend yield, and market capitalisation.

Note

A simple average treats all stocks equally; a weighted average gives larger stocks more influence. Nearly every aggregate index statistic you see — average P/E, average yield, average beta — is a weighted average.

$${\bar{x}}_w=\sum _{i=1}^N{w}_i\cdot x_i\text{where}\sum _{i=1}^N{w}_i=1$$

Related terms

Turnover, Factor Exposure, Return Attribution

Source excerpts (5)

A negative result indicates that the CEO pay rank is greater than the weighted average financial performance rank, and a positive score means that the CEO pay rank is below the weighted average financial performance rank. Finally, the r

— Pay For Performance Mechanics Dec 2016 (PDF), p. 11

Within a given single year, unadjusted burn rate is calculated as: Number of equity awards granted Weighted average common shares outstanding (basic) For informational purposes, adjusted three-year average burn rate is also included in research reports but does not

— Canada Equity Plan Scorecard (PDF), p. 14

doubt, the announced review will be implemented first, and any re-calculation of weighting cap factors shall be implemented thereafter. 5.12. VOLUME-WEIGHTED AVERAGE PRICE The volume-weighted average price (VWAP) is defined as the sum of the product of execution price and volume of each trade for a stock during th

— Dax Equity Index Methodology Guide 5526498614 (PDF), p. 22

d stocks, the minimum liquidity requirement ensures that there is no material buildup in illiquid positions in certain segments of the portfolio. The weighted average days-to-trade (cid:1856) for a given set of components (cid:1845) is defined as: (cid:3046) (cid:1875) ∙(cid:1840) (cid:1856) =(cid:3533)(cid:1875) ∙

— Stoxx Index Guide (PDF), p. 575

tion between two other sub-indices becomes possible, the algorithm switches to the new sub-index pair. Each VSTOXX main index is calculated as a time-weighted average of two VSTOXX sub-indices, as shown in the following formula: T SubIndex 2 T -T T SubIndex 2 T -T T MainIndex = 100 ∙√[ st ∙( st ) ∙ lt tm + lt ∙( lt

— Stoxx Strategy Guide (PDF), p. 29

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Y

Yield Curve

▰▰ 9

Quote

“Interest rates are to asset prices what gravity is to the apple.”

— Warren Buffett

A graphical representation of the relationship between bond yields and their maturities, typically for government securities. A normal (upward-sloping) curve indicates that longer-term bonds pay higher yields; an inverted curve, where short-term rates exceed long-term rates, has historically been a recession predictor.

Note

The yield curve is one of the most watched indicators in finance. Its shape reflects market expectations about future interest rates, inflation, and economic growth. STOXX fixed-income indices are segmented by maturity buckets that correspond to different points on the curve.

The yield curve is an empirical observation rather than a single formula. The term structure can be modelled as:

$$y(t)={\beta }_0+{\beta }_1\cdot e^{-t/\tau }+{\beta }_2\cdot \frac{t}{\tau }\cdot e^{-t/\tau }$$

This is the Nelson-Siegel model, where ${\beta }_0$ is the long-run level, ${\beta }_1$ captures slope, ${\beta }_2$ captures curvature, and $\tau$ is a decay parameter.

Related terms

Duration (Bond), Spread (Credit), Risk-Free Rate, Basis Point

Source excerpts (5)

Throughout the entire period (2019-2022), the index has largely had a positive exposure to the US term spread, as the US yield curve steepened. The exposures to the US, European, UK and Japanese term-spread factors, combined with the performance of these factors, give us the contri

— How moves in bond yield curves affect the International Real Estate Index | B…

The white bars represent volatilities from the previous 60 business day period. Figure 3. Government Zero Coupon Yield Curves US EU GB JP 3. Zero coupon bond curves built from vanilla bonds issued by the respective sovereign.

— Axioma Multi Asset Class Risk Monitor (PDF), p. 2

Yields on 10-year US Treasuries fell below those of 3-month bills in March, a so-called inversion of the yield curve that had last happened in 2007 and that is considered by many a harbinger of recession.

— Monthly Index News March 2019 (PDF), p. 11

n particular conditions such as the level of correlation between stocks, the dispersion of earnings estimates and even the shape of the US Treasury’s yield curve. A greater breadth of capabilities For asset managers, the shift of focus in the active-versus-passive debate has opened up new questions.

— The New Active-Passive Debate | Blog posts | STOXX

ising inflation fears in January 2018; an escalation of the trade war rhetoric between China and the US in May 2019; the inversion of the US Treasury yield curve in July 2019; the immediate aftermath of an initial ‘Brexit’ agreement in December 2017 between the UK and the European Union; and the period from Ma

— Minimum Variance Indices: A Reading Through Geopolitical Risk | Blog posts | …

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Disclaimer

Definitions are synthesised from publicly available STOXX and ISS Governance documentation for educational purposes. Always consult the latest official methodology guides for authoritative specifications.