FTSE Diversification index series as the 'way forward'

FTSE and QS Investors have launched an alternatively weighted index series in an effort to promote diversification across countries and industry sectors.

Diversifying across sectors

The FTSE Diversification Investing (DBI) index series, designed to promote diversification across countries and industry sectors, has been launched by FTSE Group (FTSE) in conjunction with QS Investors.

The index series seeks higher absolute and risk-adjusted returns compared with market cap-weighted indexes with less downside risk, and consists of three indexes: the FTSE DBI Developed, FTSE DBI Developed ex-US and FTSE DBI Developed ex-Japan.

The series was launched to offer diversification of risk exposure in financial products by re-weighting countries and industries to avoid concentration risk and momentum effect using a transparent, rules-based formula.

“Everything that is based on momentum drives the market,” says Jerry Moskowitz, director of business development at FTSE Americas. “The aim of the index series is to better diversify the correlation between industries and between markets, as the greater the correlation the less they are diversified. The index series seeks to take advantage of macro and behavioural inefficiencies in equity markets by developing a diversified exposure to macro risk factors.”

The alternatively weighted index series aims to help avoid concentration risk and lessens downside risk by increasing diversification in heavy allocations to passive market-cap-weighted equity strategies and allowing clients to add value in both rising and falling markets.

“Many investors have index funds, but this series is intended to diversify index funds from straight market caps, so assets can be diversified into weight,” adds Moskowitz.

The indexes are derived from the FTSE All-World Index Series, which is market-cap weighted and made up of large and mid-cap companies across all regions globally.