This article was written by Qiao Yu and Arisa Mori, Index Product Managers at Bloomberg.
Much of this year’s sizzling market rally has been led by mega-cap tech stocks, with the hype over artificial-intelligence technologies sparked by the advent of ChatGPT, as well as expectations for a Fed pivot grew with cooling inflation.
However, investors have little clarity on interest rates and the economy while entering the second half of this year. The risk of a US recession drives investors to seek quality stocks focused on profitability, according to over 40% of money managers surveyed in a recent Bloomberg MLIV Pulse Survey. Momentum factor received 21% of the overall votes in the same survey. Both quality and momentum have been well researched and proven to be the most successful strategies over the past 10 years (refer to FTW chart for factor performance).
Bloomberg Global Industry Elite 55 Index, employs these two simple strategies in one index build. It tracks the performance of top 5 companies from each of the 11 BICS Level 1 sectors based on combined rank of market cap, profit margin and return on asset, from the developed Americas and EMEA markets. Thus, the selection methodology focuses on quality of the companies.
To ride the sector momentum rally, index overweighs the companies from 3 best performing sectors and underweights the companies from bottom 3 worst performing sectors, using the risk adjusted sector momentum ranks of each BICS Level 1 sectors. Sector momentum is a rotation strategy to boost performance of the portfolio. Academics have shown that sector indices exhibit both price momentum and earnings momentum, and are profitable even after adjusting for potential transaction costs. Historically, over the past 5 years the Bloomberg Global Industry Elite 55 Index (BGIE55T Index) has delivered returns more than double that of the developed markets (as represented by the Bloomberg Developed Markets Index, Bloomberg ticker: DMTR Index). Its index members also exhibited higher profit margin (26.8%) compared to the broad developed markets (11.3%).
Through a portfolio of the “elite” stocks from all 11 sectors with an overlay of sector momentum strategy, the index provides diversified exposures to the largest and most profitable companies across developed markets from Americas and EMEA rebalancing on a quarterly basis. Although we understand that timing the market could be tricky and require very sophisticated tools at any point in time, a simple rules-based index over the long run may be an alternative approach to capture the gold mine of the markets.
Bloomberg Global Industry Elite 55 Index (BGIE55T Index) is used as benchmark for an ETF listed in Taiwan by KGI Securities Investment Trust (Bloomberg ticker: 00926 TT Equity).
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