Stoxx Limited, the European index provider, and Source, the ETF issuer, have launched new versions of the DJ Stoxx 600 supersector indices, in preparation for the launch of a new range of ETFs by Source.

The revised benchmarks, called the Dow Jones Stoxx 600 optimised supersector indices, are designed to address issues of concentration, diversification, liquidity and the availability of stocks to borrow, Source said in a press release.  The indices will also be compliant with the UCITS III rules, which set certain minimum diversification requirements.

Source has licensed eighteen of the nineteen indices for ETFs, and expects to launch the funds before the end of July, a spokesman for the issuer said.

The DJ STOXX 600 optimised supersector indices use the universe of stocks in the Dow Jones STOXX 600 Index as their starting point. Stocks from Iceland and Greece are then removed. The remaining stocks are ranked by two liquidity measures, the ratio of average daily turnover value (ADTV) to market free float, and the availability to borrow. The availability to borrow data is provided by Data Explorers, the specialist independent provider of information on securities lending and short interest. Up to 60 stocks with the lowest liquidity are removed from the index as a result of this screening.

The weightings of the indices’ constituent stocks are then optimised, using a process which reduces the proportions held in stocks with the highest ADTV ratios.  Finally, the largest stocks in each supersector are capped at between 10% and 20%, depending upon the number of stocks in that sector.  In the existing DJ Stoxx 600 supersector indices, individual stocks can dominate, with weightings of over 40% in some cases.

Ted Hood, chief executive officer of Source, said that the development of the new indices had also been prompted by investor demand.  Many leading institutions who are accustomed to investing in equity sector ETFs in the US market have been unable to do so in Europe, he explained, due to excessive index concentrations in certain stocks and difficulties in achieving the necessary trading liquidity.  Such investors have up to now been forced to invest in over-the-counter index swaps, or to customise the indices on a trade-by-trade basis with their bank counterparties, Hood added.  The new sector benchmarks are designed to address such concerns, he said.