Barclays Bank has launched a new exchange traded note, the Barclays ETN+ Shiller CAPE ETN (CAPE), a senior unsecured debt security that tracks the Shiller Barclays CAPE US Core Sector Index.
The index incorporates the Cyclically Adjusted Price Earnings Ratio or CAPE methodology and provides notional long exposure to four comparatively undervalued US equity sectors that have exhibited strong price momentum over the past 12 months. Launched on October 5, the benchmark is a brand new one with nine S&P Select Sector Indexes constituting it as technology and telecommunications sectors have been combined.
Developed originally by Yale professors Robert Shiller and John Campbell, the CAPE ratio seeks to find the best times to buy or sell stocks based on their price relative to historic earnings.
The CAPE ratio is calculated by dividing the price of a share by its inflation adjusted average earnings for the past 10 years, thus offsetting the earnings volatility of conventional price-earnings ratio. The ratio is used to determine whether stocks are over or under valued relative to fixed-income products.
However, the Barclays ETN will follow a different methodology and will use the CAPE ratio to find out the most undervalued stocks on a monthly basis in four sectors based on the sectors’ current ratio compared to the historical average.
It will then hold four options on the industries it believes to be most undervalued compared to the Shiller CAPE ratio and that have also displayed relatively stronger price momentum over the past twelve months. Allocations are equally weighted among the four selected sectors.
Results from the historical 10-year hypothetical backtest produced an annualized return of 10.8 percent (after adjusting for fees) with a standard deviation of 19.6 percent. The S&P 500 Total Return Index gained 7.2 percent with a standard deviation of 21.2 percent during the same period. The product has an annual expense ratio of 0.45 percent.
This is a brand new ETN, which will first need to prove itself over time before I would consider it investment material.
Disclosure: No holdings