Methodology Change | SOLACTIVE MOMENTUM LONG INDEX | Effective Date 28/07/2020

Today, on the 20/07/2020, Solactive announces the following changes to the methodology of the following Indices (the ‘Affected Indices’):

Rationale for methodology change

Solactive AG deems the current Index Methodology lacking regarding the suitability to potential long/short strategies. The Affected Indices are set up in a way, that they can be used as the long leg in a long/short strategy on the U.S. equity market. Their objective is to include all the securities from the Solactive U.S. Broad Market Index, that are eligible after optimizing for a maximum momentum score under various constraints. In evaluating the Original Screening Criteria and the resulting securities included in the Affected Indices, a lack of consideration of borrowing costs was identified. This makes the Affected Indices not a suitable part of potential long/short strategies. In order to align better with the objective of the Affected Indices, the following changes are proposed.

Changes to the Index Guideline

2.2. SELECTION OF THE INDEX COMPONENTS

From (old version):

Based on the INDEX UNIVERSE, the initial composition of the INDEX as well as any selection for an ordinary rebalance is determined on the SELECTION DAY in accordance with the following rules (the “INDEX COMPONENT REQUIREMENTS“):

Step 1: For all securities in the INDEX UNIVERSE, exclude stocks with pending mergers, acquisitions, tender offers or spinoffs.

Step 2: Exclude all stocks that have an average daily value traded (ADV) of less than USD 10 million based on the median daily trading volume of the last 20 trading days.

Step 3: Calculate the momentum z-score for every remaining stock. The momentum is defined using each stock’s cumulative return over the last 250 trading days minus the last 20 trading days.

Step 4: The 50% of stocks with the highest momentum z-score are included in the optimization.

Step 5: An optimization is performed to maximize the momentum score. The momentum score is defined as the sum product of individual weights and momentum z-scores. The optimization is performed in two steps. In a first step, all stocks with an optimal weight of less than 0.2% are removed from the dataset. In a second step, the reminder is again optimized for the final weights. The method used is Sequential Least Squares Programming (SLSQP). The optimizations are performed with respect to the following constraints:

–                  Value Constraint: The aggregate of the weights of each eligible stock in the portfolio must equal 100%.

–                  Maximum Weight Constraint: The value of each stock’s weight is less than or equal to 2%.

–                  Minimum Weight Constraint: The value of each stock’s weight is greater than or equal to 0.20%.

–                  Sector Constraint: The aggregate of the weights of each eligible stock in each sector must be less than or equal to 25 percent of the portfolio weights. We define sector using the Factset L1 (“Economy”) classification. If no solution is found, the constrained is relaxed to 30 percent.

–                  Trading Liquidity Constraint: Each eligible stock’s weight multiplied by USD 500 million must not exceed 10% of each stock’s ADV based on the median daily trading volume of the last 20 trading days. 

The selection of the INDEX COMPONENTS is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decisions.

To (new version):

Based on the INDEX UNIVERSE, the initial composition of the INDEX as well as any selection for an ordinary rebalance is determined on the SELECTION DAY in accordance with the following rules (the “INDEX COMPONENT REQUIREMENTS“):

Step 1: For all securities in the INDEX UNIVERSE, exclude stocks with pending mergers, acquisitions, tender offers or spinoffs.

Step 2: Exclude all stocks with borrowing costs of more than 2 % at the SELECTION DAY. Borrowing costs of each security are determined by the DATA PROVIDER.

Step 3: Exclude all stocks that have an average daily value traded (ADV) of less than USD 10 million based on the median daily trading volume of the last 20 trading days.

Step 4: Calculate the momentum z-score for every remaining stock. The momentum is defined using each stock’s cumulative return over the last 250 trading days minus the last 20 trading days.

Step 5: The 50% of stocks with the highest momentum z-score are included in the optimization.

Step 6: An optimization is performed to maximize the momentum score. The momentum score is defined as the sum product of individual weights and momentum z-scores. The optimization is performed in two steps. In a first step, all stocks with an optimal weight of less than 0.2% are removed from the dataset. In a second step, the reminder is again optimized for the final weights. The method used is Sequential Least Squares Programming (SLSQP). The optimizations are performed with respect to the following constraints:

–                  Value Constraint: The aggregate of the weights of each eligible stock in the portfolio must equal 100%.

–                  Maximum Weight Constraint: The value of each stock’s weight is less than or equal to 2%.

–                  Minimum Weight Constraint: The value of each stock’s weight is greater than or equal to 0.20%.

–                  Sector Constraint: The aggregate of the weights of each eligible stock in each sector must be less than or equal to 25 percent of the portfolio weights. We define sector using the Factset L1 (“Economy”) classification. If no solution is found, the constrained is relaxed to 30 percent.

–                  Trading Liquidity Constraint: Each eligible stock’s weight multiplied by USD 500 million must not exceed 10% of each stock’s ADV based on the median daily trading volume of the last 20 trading days. 

The selection of the INDEX COMPONENTS is fully rule-based and the INDEX ADMINISTRATOR cannot make any discretionary decisions

Defined terms used in this announcement, but not defined herein, have the meaning assigned to them in the respective index guideline of the Affected Indices. The amended version of the index guideline will be available on the effective date.