The Intellidex family of style indexes are really best understood as "enhanced indexes." Created by the American Stock Exchange, these products are used as the basis for (recently-launched) ETFs from PowerShares Capital Management.
Like all the style families, the Intellidex indexes break the market down into growth and value using a defined set of criteria. But these indexes take things one step further, selecting a small number of stocks within each category that are expected to have the greatest capital appreciation over the coming months. The company uses a proprietary quantitative analysis strategy to choose these stocks, and it is these "selected" stocks that make up each index.
The Intellidex style indexes win the prize for the most criteria used to separate growth from value, with ten:
- Earnings growth forecasts
- Sales growth
- Cash flow growth
- Book value growth
- Earnings growth
- Forward earnings estimates/price ratio
- Sales/price ratio
- Cash flow/price ratio
- Book value/price ratio
- Dividend yield/price ratio.
These measures are all assigned an equal weight in the calculations, and represent a balanced approach to the earnings/book value debate.
Interestingly, however, because of their unique selection process, the Intellidex indexes tend to have the highest price/book ratio of all the index families - for both the growth and value indexes. In other words, the selection process overrides the impact of the criteria used to divide the market originally into growth and value.
FTSE: Style Indexing On An International Scale
A review of style indexing wouldn't be complete without mentioning FTSE, the style indexing leader in Europe. FTSE uses a complex methodology to create its growth and value indexes, relying on a nine-part analysis of each stock. The components used are:
- Price/Book Ratio
- Sales/Price Ratio
- Dividend Yield
- Cash Flow/Price
- 3-Year Historic EPS Growth
- 3-Year Historic Sales Growth
- 2-Year Forward EPS Growth
- 2-Year Forward Sales Growth
- Return on Equity*(1-Payout Ratio)
Each measure is given an equal weighting in the analysis, placing FTSE somewhere towards the earnings end of the earnings vs. book value spectrum. Under the FTSE system, a stock's market capitalization can be divided among the growth and value indexes.