Internet Indexes Survey: Who Do You Like?

January 01, 1999

A number of so-called 'Internet indexes', some more prominent than others, keep track of the internet industry and related sectors. Some focus solely on the Internet; others survey a wider range of technology stocks; none are more than a few years old.

The most recent addition to this category of indexes, and therefore the one with the most established competition to overcome, is the Dow Jones Internet Index (DJII) launched Feb. 17. The 40-stock index includes only companies that derive the majority of their revenues from the Internet and seeks to represent 80% of the market capitalization of Internet stocks.

Within the main index are two subindexes: The commerce index tracks the shares of 15 firms which receive at least 50% of their revenue from providing goods and services online. The services index consists of 25 firms that generate at least 50% of their income by providing Internet-access services and products.

The sub-indexes are weighted by market capitalization, with a ceiling that limits a stock's market value to no more than 10% of either sub-index.

'Every Tom, Dick and Harry has an Internet index,' said Anthony Italiano, a senior analyst at Dow Jones Indexes. 'We want to take it to the next phase.'

As of Feb. 26., the Chicago Board Options Exchange began trading options on the Dow Jones Internet Commerce Index.


@net, [email protected] Week magazine's Internet index, could be considered the grandfather of Internet indexes: It was launched way back in 1995.

'It's the first benchmark to track the Internet industry,' said Stephan Pechdimaldji, spokesperson for the American Stock Exchange, where options on the @net have been traded since its inception.

'It's very broad and covers all facets of the industry.' The 50 stocks are reviewed on a quarterly basis and include Infoseek Corp., Inc., Yahoo! Inc. and Cybercash Inc.

'We try to choose companies that are leaders in their industry or are building out into new ones,' said Kimberly Weisul, Business Editor of [email protected] Week.

The team that chooses the index tries to maintain a very low turnover, and usually companies are only added when there is a merger, such as the one between America Online and Netscape, she said. A company may also be removed if its trading volume or market capitalization is especially low. Weisul emphasized that [email protected] Week will try to keep a company in the index if it is simply in a slump.

[email protected] Week also maintains the @100 index which tracks 100 companies that have significant involvement in the Internet, but don't derive most of their business from it.

Index Creator/Sponsor # of Stocks Weighting Method Year of Inception Investment Products # of Sub-Categories
@net [email protected] Week 50 Market Cap 1995 Options on Amex 0
Isdex LLC 50 Modified Mkt Cap 1996 Futures and options on futures to be traded on the KCBT beginning June 1, 1999 7
HQ Internet Index Hambrecht & Quist approx. 60 Market Cap, w/ceiling 1996 None 5
INX CBOE 12 Equal-dollar 1996 Options and reduced value Leaps on the CBOE 0
GSTI Internet Index Goldman Sachs 15 Modified Mkt Cap 1996 Options on the CBOE 0
Public Internet Company Database MSDW approx. 95 Equal-dollar 1997 None 0
TSC Internet Index 20 Equal-dollar 1998 Options on the Philadelphia  
Intdex Pegasus Research Intl 50 Market Cap 1998 None 7
Dow Jones Internet Index Dow Jones 40 Modified Mkt Cap 1999 Options on the CBOE 2


Another of the earliest Internet indexes was the Isdex (for Internet Stock Index), created by Steve Harmon, senior investment analyst at Mecklermedia's LLC. It was launched in April 1996, when Internet stocks were just beginning to catch the attention of investors. Since its inception it has become one of the most accepted measures of the Internet industry. Harmon says the drive to create the index came from the fact that at the time, there was no 'pureplay Internet stock index.'

The Isdex also focuses on companies that derive the majority of their income from the Internet. There are several informal rules that govern which Internet stocks make it into the 50-stock index. For example, if there are several companies doing the same thing, the Isdex will include the one that is the leader in the field. In addition, the overall sales growth of a company is compared with that of its peers within its sub-sector in the Isdex and within the overall Internet universe, said Harmon.

The Isdex provides a closer look at industries within the larger Internet industry through its sub-sectors. The seven categories: e-commerce/e-tailer, software, hardware, security, content, high-speed services and access. The stocks are reviewed on at least a quarterly basis. The list of 50 stocks in the Isdex includes such obvious mainstays as Cisco Systems, E*Trade, GeoCities and Netscape. The index uses a modified market capital-izaiton weighting method similar to the DJII in which no stock can equal more than 10% of the index's capitalization.

Options on the Isdex are expected to begin trading on the Kansas City Board of Trade relatively soon, Harmon said.


Hambrecht & Quist, an investment banking company, was also an early bird, launching its Internet index in January 1996. It consists of approximately 60 stocks. 'The approximation is so that we're not held to a certain count,' said Mike DeWitt, Senior Statistician for Hambrecht & Quist Research. That way, when companies merge, split or are taken over, there is no need to make sudden changes to the index, he said. Substitutions are made semi-annually.

The index's stocks are chosen to accurately represent a cross-section of the different divisions of the internet, DeWitt said. The index is made up of five sectors, including Commerce Technologies and Services, Communications Technologies and Services, Content Services, Security and Internet Software. The index is comprised of such companies as Egghead.Com Inc., E*Trade Group Inc., @Home Corp., Intuit and Microsoft Corp.

One of the most interesting features of the Hambrecht & Quist Internet Index is its weighting method. Weighting each stock equally in the index so that all the differences between them are erased 'isn't right,' said DeWitt. But neither is weighting the index entirely by market capitalization, he added.

'When you have a few large, bellwether companies, three or four companies could make up 90% of the market capitalization of the index,' De Witt said. 'Total market cap weighting is too skewed.'

Instead Hambrecht & Quist has imposed a market cap ceiling that limits the influence of individual companies to no more than $1 billion at the beginning of each year.


Investment bank Goldman Sachs & Co. also maintains an Internet index. It is one of six sub-indexes of the Goldman Sachs Technology Index (GSTI), which was launched in April, 1996.

The GSTI is a rule-based index that provides a broad-based measure for the technology industry. The sub-indexes have no set rules and are compiled by analysts who specialize in those particular market sectors. They are weighted using a modified market-capitalization method in which the largest, second-largest and third-largest stocks can make up no more than 25%, 20% and 15% of the index, respectively.

As of April 1, 1999, the GSTI Internet sub-index consisted of 15 stocks, though there is no set number. It includes Internet access providers, e-commerce companies, Internet hardware and software providers, content providers, Internet portals and Internet service providers.

The CBOE has traded options on the GSTI and its sub-sectors since September 1996.


Morgan Stanley Dean Witter calculates an index from its Public Internet Company Database. The database is drawn from a universe of stocks that consists of all Internet-related initial public offerings since Netscape's IPO on Aug. 8, 1995. The index based on the database is equal-weighted and has been calculated since Dec. 31, 1997.

Currently, the database consists of 95 stocks, though the number fluctuates. MSDW only considers IPOs that are taken by the top investment banking firms and that are directly involved in the Internet industry. It also bases its decisions on who the IPO's direct competitors are and whether the IPO has created a new niche for itself.

THE TSC is yet another Internet publication that has created its own Internet indexes, the TSC Internet Index and the brand-new TSC E-Commerce Index. One key difference between these two indexes and many other Internet indexes is that's indexes are equal dollar-weighted as opposed to capitalization-weighted.

'With both indices, a move in one component company has the same impact as a move in another component company, regardless of size,' confirmed Sean McLaughlin, the spokesperson for

The creators of the older TSC Internet Index, including the Philadelphia Stock Exchange and Susquehanna Investment Group, noticed that capitalization-weighted indexes that had big companies like Cisco System Inc. tended to mirror the stock movements of those few companies.

Indexes 'that had Cisco, tended to move like Cisco,' McLaughlin said.

'We wanted to minimize the impact of one or two large stocks and present a better picture to investors of how inter-net stocks were doing' as a whole. The e-commerce index was created with similar intentions.

The TSC Internet Index was launched in December, 1998, with 20 stocks. Options on it are traded on the Philadelphia Stock Exchange.

Launched in February 1999, the TSC E-Commerce Index consists of 15 companies that earn a significant amount of their revenues through commerce conducted over the Internet. Some of the stocks overlap with those in the Internet index. Options on the e-commerce index are traded on the Amex.


The CBOE (for Chicago Board Options Exchange) created its own Internet Index, INX, three years ago. The index was one of the first Internet stock indexes to have options traded on it. It tracks 12 Internet stocks, including America Online Inc., Infoseek Corp., Cisco Systems Inc. and Sun Microsystems Inc. The companies that compose the index represent 'the foundation of the Internet,' said CBOE spokesperson Michael Van Dam.


Pegasus Research International, a media research firm based in New York specializing in the Internet and e-commerce, is courting portfolio managers with its Internet index.

The 50-stock Pegasus Internet Index, or Intdex, was created just last year.

It is weighted by market capitalization and divided into seven sub-sectors including Financial Services, Content Aggregators, E-tailers, Service Providers, Internet Software, Internet Security and Miscellaneous Services. Content Aggregators represent more than 50% of the Index's market capitalization with America Online alone accounting for one third of the index, according to a company report. Weighting by market capitalization captures the total economic value of a group of companies and is also a more accurate way to track shareholder wealth, according to the report.

'For institutional investors, there was really nothing out there to suit their needs,' said Greg Kyle, president of Pegasus Research.

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