Aikido Finance
Pricing

About

Resources

launch app
Xplore Stocks universe

2. Understanding the Stocks Universe

Beginner
Back to topic: 6. Xplore Stocks - Create your own strategies

Aikido

February 2023 · 5 min read

Introduction

The investment 'universe' is the term used to define the set of assets to research and trade.

There are simply too many securities in the world to monitor, so we must narrow our focus to a subset of these. We can filter by asset class by choosing to only invest in stocks and exclude bonds, currencies, and commodities for example. We can also filter by geography, exchange, market capitalisation or liquidity for example. Our choice of universe dictates a lot about the potential risk and return of our investments. Each investor has different preferences on what kind of securities they want to research. This could be based on what country they live in or their particular interests and/or experience.

The Aikido Stocks Universe

Let's take a look at how we construct our top-level universe of equities at Aikido Finance. We apply the following filters by default:

  • Starting with our entire database of equities. After crunching some numbers, we find that there are 112,000 equities traded in the world. These are dispersed across 143 different countries.
  • We then filter this list down by geography and equity type, selecting ~8500 US common stocks that have traded on public exchanges since 2010.
  • Next, we'll add a minimum price and minimum average daily volume (ADV) filter. We select stocks that have maintained a close price above $2 and an ADV above $500,000. This step helps remove any illiquid stocks that could be delisted as they fall under the exchange price and liquidity requirements.
  • Finally, we remove Over-the-Counter (OTCs) stocks, acquisition companies (SPACs) and Chinese ADRs.

Let's take a look at how many stocks this leaves us with. Since we research and backtest strategies on a point-in-time basis, the universe of investable stocks changes over time as we can see.

Aikido Common Stock Universe Size through Time

The Aikido universe ranges in size from ~2700 to ~4500 stocks, after applying the filters we described above. Note the large expansion in 2020 when a thousand new companies were listed. There has been a sharp decline since 2021 as many companies have delisted in the current market drawdown in 2022.


Build your own Universe

With the Xplore Stocks tools, we allow users to filter our preselected universe by small, mid and large market capitalisation and sector so our users can design strategies that suit their personal needs.

Choose the market capitalisation range and your sectors
Market Capitalisation

The first option is to select the range of market caps that you'd like to invest in. You can choose from Small-Cap, Mid-Cap, and Large-Cap. The default is to use the whole universe of stocks so we auto-select all the market caps.

  • Small-Caps are the stocks that have a market cap lower than the 25th percentile.
  • Large-Caps are the stocks that have a market cap greater than the 75th percentile.
  • Mid-cap stocks are those that fall within the range between the 25th and 75th percentile.

Let's take a look at a chart to make this a little clearer. We'll plot the average market cap of each bucket (small, mid, and large cap) across time.

Average market capitalisation of small, mid, and large cap ranges denominated in $ Millions through time.

Since 2010, the average market cap of the Small-Caps is ~$500M, the average market cap of the Mid-Caps is ~$1.5B, and the average market cap of the Large-Caps is ~$5B.

Sectors

The final step of defining your universe is to choose your sectors. There are 20 sectors in total covering a very broad range of industries. We normally suggest using a broad set of sectors when creating your investment strategies so you limit your exposure to very concentrated sectors. However due to the market dynamics some sectors are just naturally a lot larger than others, as we will see, so some sector risk is unavoidable. Let's look at the data to help explain the sectors a bit more.

Count of US common stocks in each Sector

As we can see from the above breakdown, the Financial sector accounts for ~26% of our universe. Contrast that to the Communications sector, which comprises only ~1.5% of all entities. The top 3 sectors account for over 50% of the universe. Now, let's look at each sector's market cap.

Breakdown of universe by Sector and Market Cap

In the above chart, we have summed the market cap of each sector. We can see a more even spread across the sectors. Technology Services has the largest market cap with ~17% while the Distribution Services sector lags behind at just ~1%.

Summary

Be mindful of how you choose your investment universe and use the above data to guide your decision. If you filter too aggressively, in terms of market cap and sectors, you might end up with a very small universe size - which may be riskier and could negatively impact your returns.

Start exploring and testing your investment ideas with intuitive pro-tools. Have fun constructing your personalized investment strategies and let us know any feedback.

Back to topic: 6. Xplore Stocks - Create your own strategies

More in
6. Xplore Stocks - Create your own strategies
PreviousNext
Introduction to Xplore Stocks. Design, create and invest in your own factor investing strategy
0. Introduction to Xplore Stocks
November 09, 2022 · 2 min read