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Journal of Indexes

DJI’s Total Market: Major Index Change

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Dow Jones Indexes has launched the first two indexes in its Total Market Index Series. The moves are a major step forward in DJI's plan to substantially increase its coverage of the world's more important equity markets. The Dow Jones Australia Index and the Dow Jones US Total Market Index were introduced on January 16 and February 21, respectively, along with accompanying large-, mid-, and small-cap sub-indexes. Between them, the two countries contribute 50.22% by market capitalization of the equities from 34 countries that are currently included in the Dow Jones Global Indexes.

Both of the broader, new benchmark indexes offer 95% coverage of each country's market rather than including a fixed number of stocks. Components of the size indexes are determined by percentages as well: Stocks representing the top 70% of the market value of the country's investable universe are included in the large-cap index, and the next 20% is included in the mid-cap index. Each country's small-cap index represents 50% of the remaining market value rather than the full 10% of the country's total market value in order to avoid liquidity problems.

"We designed the index(es) as a benchmark, but we also wanted (them) to be suitable as the basis for investable products," said Michael A. Petronella, Managing Director of Dow Jones Indexes. "By excluding very small and little-traded stocks, we've created an index that investment managers can replicate easily."

Dow Jones has stated that the Total Market Index Series will be expanded to include other countries in the future. Most should be completed in 2000-2001, though certain developing countries may have to wait until their markets mature enough to make so high a level of coverage feasible in a replicable index.

Both of the new indexes make use of the new Dow Jones global industry classification system, which was introduced this year. The new three-tier system has 10 market sectors, 40 industry groups, and 70 sub-groups. The new structure is a response to the changing shape of the global economy as a result of globalization, government de-regulation, emerging industries and splits and spinoffs.

"We recognize the importance of keeping classification systems current," said John A. Prestbo, Editor of Dow Jones Indexes. "Only with an up-to-date structure can investment managers obtain a full, accurate reading of market performance."

 

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