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Guide to enhanced indexingComparing performance of enhanced index funds
As market volatility has increased and global economic conditions have deteriorated in the past few years, more attention has been paid to passive investments such as index trackers, with investors attracted by low costs and a perception of lower risk.
But as these funds and listed products track indices subject to swings in investor sentiment and sell-offs in particular sectors, depending on economic and geopolitical events, the appeal of an enhanced index tracker has proved popular.
Performance of many of these products appears strong, as Investment Association listed funds with ‘enhanced index’ in the name, have tended to outperform their relevant sector average.
For example in the IA Global sector, the Aberdeen World Equity Enhanced Index fund delivered a one year return to September 7 2016 of 25.1 per cent, and the Invesco Perpetual Global ex UK Enhanced Index (No Trail) fund returned 27.4 per cent in the same period, with both vehicles outperforming the sector average of 22 per cent, data from FE Analytics shows.
Table 1: Standard Performance Table of Enhanced Index Funds in IA sector
| Name | Investment Association sector | 1m | 3m | 6m | 1yr | 3yr | 5yr | 10yr |
| Aberdeen - Japan Equity Enhanced Index B in GB | Japan | 3.12 | 17.82 | 18.89 | 28.39 | |||
| Aberdeen - Northern American Equity Enhanced Index B in GB | North America | -0.45 | 13.21 | 15.33 | 28.05 | |||
| Invesco Perpetual - Global Ex UK Enhanced Index No Trail Inc TR in GB** | Global | 0.75 | 13.29 | 16.56 | 27.4 | 47.77 | 109.16 | 136.41 |
| Aberdeen - World Equity Enhanced Index B in GB | Global | 0.46 | 13.02 | 16.07 | 25.14 | |||
| Aberdeen - European Equity Enhanced Index B in GB | Europe Excluding UK | 2.34 | 9.6 | 15.43 | 18.57 | |||
| Invesco Perpetual - UK Enhanced Index No Trail Acc in GB | UK All Companies | 1.31 | 7.9 | 12.24 | 14.22 | 23.15 | 73.72 | 79.72 |
| Aberdeen - Asia Pacific Equity Enhanced Index B Acc in GB | Asia Pacific Excluding Japan | 2.78 | 21.31 | |||||
| Aberdeen - UK Equity Enhanced Index B Acc in GB | UK All Companies | 1.88 | 8.52 | |||||
| Invesco Perpetual - European ex UK Enhanced Index Z Acc in GB | Europe Excluding UK | 2.9 | ||||||
| Invesco Perpetual - US Enhanced Index Z Acc in GB | North America | -0.61 |
Note: Pricing Spread: Bid-Bid,Period: Latest Date (07 Sep 2016),Currency: Pounds Sterling
Table 2: Standard Performance Table of Enhanced Index Funds in FCA recognised offshore sector
| Name | FCA recognised offshore sector | 1m | 3m | 6m | 1yr | 3yr | 5yr | 10yr |
| JPM - US Research Enhanced Index Equity C (perf) Acc NAV USD in GB | Equity - USA | -1.75 | 12.61 | 17.95 | 29.7 | 61.17 | 135.24 | |
| AXA Rosbrg - US Enhanced Index Equity Alpha B USD in GB | Equity - USA | -2.87 | 12.34 | 15.33 | 28.98 | 54.91 | 129.38 | |
| JPM - Global Research Enhanced Index Equity C (perf) Acc NAV EUR in GB | Equity - International | -0.33 | 12.49 | 17.3 | 25.86 | 44.09 | ||
| AXA Rosbrg - Japan Enhanced Index Equity Alpha B JPY in GB | Equity - Japan | 2.19 | 13.97 | 16.34 | 23.88 | 37.25 | 72.43 | |
| Blackrock - Euro Government Enhanced Index in GB | Fixed Int - EUR Investment Grade | -1.12 | 9.93 | 12.68 | 23.69 | 25 | 33.98 | 115.87 |
| Blackrock - Euro Credit Enhanced Index Inst Dis EUR TR in GB** | Fixed Int - EUR Investment Grade | -0.88 | 9.7 | 12.39 | 19.86 | 14.93 | 21.52 | 99.58 |
| JPM - Europe Research Enhanced Index Equity X Acc NAV EUR in GB** | Equity - Europe inc UK | 1.97 | 9.88 | 15.37 | 17.19 | 25.6 | ||
| AXA Rosbrg - Pan European Enhanced Index Equity Alpha B EUR in GB | Equity - Europe inc UK | 0.91 | 7.69 | 12.2 | 13.62 | 17.96 | 58.72 |
Note: Pricing Spread: Bid-Bid,Period: Latest Date (07 Sep 2016),Currency: Pounds Sterling
However, for investors the issue with performance comparisons lies in the very thing that makes enhanced indexing so attractive. The fact there is so many different variations of portfolios, from low volatility to dividend yield and from fixed income to equities, that it can be equated to comparing apples with oranges.
Shakhista Mukhamedova, structured and passive investments analyst at Brewin Dolphin, points out: “There is a divergence in performance because different ETFs use slightly different criteria to select stocks for their portfolios.
“For example, two ETFs [the SPDR S&P Euro Dividend Aristocrats Ucits ETF and WisdomTree Europe Equity Income Ucits ETF] that aim to construct a portfolio of higher yielding stocks [have] performed very differently since common inception.”
Performance of SPDR S&P Euro Dividend Aristocrats Ucits ETF and WisdomTree Europe Equity Income Ucits ETF vs the EURO STOXX 50 Price EUR index
Source: Bloomberg via Brewin Dolphin
Martin Bamford, managing director of Informed Choice, notes: “This approach is still relatively new in the UK market, although it has been used for longer by ETF fund managers. The iShares UK Dividend Ucits ETF is one ETF following an enhanced index strategy, as it aims to track the FTSE UK Dividend+ Index.
“This Index is designed to represent the performance of the 50 highest yielding companies in the FTSE 350 index, excluding investment trusts. Over the past five years, the ETF has returned 70.77 per cent compared with a return of 59.5 per cent from the FTSE 350 index.”
