The trend of “smart beta” exchange traded funds being used by investors took another twist yesterday with the announcement by Barclays that an index based on a cyclically-adjusted valuation ratio has been licensed to specialist manager Ossiam.

The trend of “smart beta” exchange traded funds being used by investors took another twist yesterday with the announcement by Barclays that an index based on a cyclically-adjusted valuation ratio has been licensed to specialist manager Ossiam.

The index is called the Shiller Barclays CAPE ® Europe Sector Value Index. Ossiam will use the index for a new exchange traded fund that will be compliant within a UCITS structure so it can be sold across various European nations and listed on a variety of exchanges. The index has been developed by Barclays, the UK bank, and renowned investment figure Professor Robert Shiller of Yale University. It uses the cyclically adjusted price-to-earnings (CAPE®) ratio as a major valuation driver in a sector rotational strategy.

While the definition of “smart beta” varies, one fairly common definition is that a smart beta fund, for example, tracks a style index or uses a mechanical investing strategy to obtain the returns associated with a particular strategy without the cost of active management. One example might be an index tracking returns obtained by value investing. Late last year, Invesco PowerShares said demand for such products in Europe is growing rapidly.

“The indices are designed to offer large cap equity market exposure with a value bias, and are intended for buy-and-hold investors with a multi-year time horizon. The first indices of the family, based on the US market, were launched in September 2012,” said a press release from Barclays.

The index family went live in September 2013. Starting with a universe of ten sectors, it systematically identifies and allocates to the four most undervalued sectors, according to the CAPE® ratio developed by Professor Shiller.

The Shiller Barclays CAPE® Sector Europe Index has delivered an annualised return of 14.07 per cent since going live, compared to 13.01 per cent for the MSCI Europe Index (source: Bloomberg and Barclays).