Bloomberg Enters Index-Licensing Business

April 01, 2001

Bloomberg LP has raised a large family of indexes for years, including U.S. state and regional stock indexes and its Bloomberg European 500 Index. However, it hadn't moved to capitalize on the index-investing trend of the 1990s as many other index providers, including Dow Jones, Morgan Stanley Capital International and Standard & Poor's, have done.

Until now.

In January, the company announced that it was entering the index-licensing business, and by March, Barclays Global Investors launched four of its iShares funds on the London Stock Exchange's extraMARK segment based on pan-European indexes from Bloomberg. Kevin Swann, manager of Bloomberg Index License, says the decision to enter the licensing business was largely driven by client demand, plus having the experience and resources to be successful.

'We have been constructing indices for a long time on the system, and we do have obviously a huge database of pricing, fundamentals,  analytic (tools) and classifications to go with these things,' Mr. Swann says.

Bloomberg's current family of investable indexes includes the four pan-European sector indexes licensed by BGI that draw their components from the Bloomberg European 500 index. The indexes are weighted by modified market capitalization that classifies each component into one of three weighting tiers, a feature that ensures the indexes will meet diversification requirements and thus are investable indexes in Europe. Each index is limited to no more than 40 stocks and is denominated both in British sterling and in euro.

The Bloomberg Investable Financials Index draws its components from the company's Level I Financials sector classification. The Bloomberg Investable Telecommunications Index draws its components from Bloomberg's Level II Telecommunications sector. The other two indexes take their components from multiple sector classifications within the Bloomberg classification system.

The Bloomberg European Investable Technology Index's components are selected from the Level I

Technology sector and the Level II Internet sector.
T h e B l o o m b e r g E u r o p e a n I n v e s t a b l e Pharmaceutical Index's components are selected from the Level II Pharmaceuticals, Biotechnology and Healthcare Products sectors. Bloomberg also has constructed the Bloomberg European New Markets 50 Index (BENMAX50), an index of growth-oriented, mid-cap European stocks. Components are defined as 'growth' stocks by being listed on a local exchange's growth market or growth segment or included in its growth index. Stocks designated as potential components are then selected for the index based on market capitalization and liquidity. Each component is capped at 10% of the index.

The index was created specifically for use as the basis for investable products. Mr. Swann says Bloomberg's reputation as a trustworthy company also should be advantageous in the index-licensing business. 'I think a lot of it comes down to the fact that people see us as an independent and neutral entity, with no particular ax to grind or anything. And we also have always had, as a firm, a very high integrity,' Mr. Swann says.

Herbert Blank, president of QED International Associates Inc., a New York-based consulting firm, says he thinks the new venture has every chance of thriving. 'I have no reason to bet against their success,' he says.

He underscores Bloomberg's resources and experience by pointing out that it was the first index provider to calculate global indexes on a real time basis with the International Herald Tribune index. 'From the standpoint of being able to provide real-time pricing, they're a real strong player, and I think they're levering off their traditional strength of providing data information,' Mr. Blank adds.

And while the field of broad-based global indexes might be a bit crowded, it is wide open for specialty and customized indexes. 'I've got to tell you, as somebody who does custom indexes, that we've had more demand than ever. And there seems to be more demand for indexes, particularly those that can be used for fund products ' rather than institutional benchmarking ' than ever,' Mr. Blank says.
'I think if they wanted to do a broad-based institutional benchmark here in the United States, that would not be the way to go. But that's clearly not their strategy,' he adds, likening Bloomberg's efforts to Fortune magazine's creation of two specialty indexes for use as investable products.

Mr. Swann says that global indexes are a possibility in the future. 'We are at the moment concentrating on European. We will then expand as we see the demand for the product.' He adds that there will be more indexes in Bloomberg's European line-up before the end of this year. Mr. Blank says that the Bloomberg brand name is particularly suited for investable products because of the solid reputation and popularity it enjoys among retail and smaller institutional investors.

'I think branding is a big part of this (indexlicensing game). That's why Nasdaq is so successful in this --they spent six years building up a very powerful brand and image,' he says. 'I think branding is very overlooked here. So far, the most successful products have been those launched by exchanges on exchange indexes, not those launched by large institutional asset-management service providers.

While everything institutional in the United States is (based on) MSCI (indexes), seven out of 10 retail investors never heard of MSCI. But they have heard of Bloomberg.'

Providers Begin Considering After-Tax Versions Of Indexes
(From The Wall Street Journal)

What is the after-tax return for the Standard & Poor's 500-stock index? That question hasn't gotten much attention in the past, but it is one with which David Blitzer, chairman of S&P's index committee, says he has begun to wrestle. 'I think sooner or later, we're going to have to bite the bullet and do it,' Mr. Blitzer says.

Officials at Wilshire Asset Management, which oversees the broad-based Wilshire 5000 Total Market Index, also say they are likely to look into after-tax returns for their index. And Frank Russell Co. says it has started to think about calculating after-tax returns for its Russell indexes.

Interest in calculating after-tax returns for indexes has been triggered because most mutual funds must begin disclosing their investment performance on an after-tax basis later this year. A new rule by the Securities and Exchange Commission spells out how funds should do the math -- by assuming investors fall into the top federal tax bracket, for example -- and where to publish the results in prospectuses. The SEC, however, said nothing about adjusting the returns of the S&P 500 or other benchmark indexes for taxes. Various market indexes are used to compare how mutual funds perform against broad groups of securities as an indicator of whether the fund manager is adding value to portfolio returns.

The lack of tax-adjusted indexes seems like an oversight to some fund companies that already cringe when investors compare returns to the raw S&P 500, which isn't subject to real-world operating expenses.

Now, these fund officials worry, investors might compare index returns that aren't adjusted for taxes to fund returns that are. That makes comparisons more difficult for the fund companies, which naturally don't want to compete against a higher benchmark than necessary.

'To make an apples-to-apples comparison of how a manager performs on an after-tax basis, having after-tax benchmarks would be a good thing,' says Vanguard Group tax expert Joel Dickson. 'Right now, we don't have really good benchmarks.' But how to calculate taxes on an index that isn't subject to taxes? 'There's no such thing as a pretax or after-tax return on an index,' says Gary Gastineau, managing director at Nuveen Investments Inc., a unit of John Nuveen & Co. in Chicago. 'What you're doing is applying the rules of a hypothetical investor to a hypothetical fund.'

Among the complexities: Actual tax bites often depend on how long an investment is held before sale, so index managers would have to pick starting dates for their index 'portfolios.' Then, index changes and reweightings could generate taxable capital gains or tax-reducing losses that would have to be figured into after-tax returns.

Managers of the Wilshire 5000, the broadest domestic stock index, needn't worry much about swapping new index members in and out, but they would have to keep up with the tax impact of spin-offs and other events at thousands of companies. Some indexes also would have to consider the tax consequences of withholding on gains from foreign stock sales, observers say.

'There would be a host of issues to track and measure, no question,' says Wilshire Associates Inc. Senior Managing Director Tom Stevens, who runs the Santa Monica, Calif., firm's Wilshire Asset Management unit. Real-world funds must track these things to make their own tax calculations for shareholders and Uncle Sam, of course. But they are dealing with actual taxable events and also have help from a bevy of tax experts and attorneys to assess each fund's unique circumstances.

But after-tax returns on benchmarks must be calculated consistently if they are to be fair, says John Austin, vice president at TowersData Inc. of Bethesda, Md., which develops tax software for fund groups.

Still, S&P's Mr. Blitzer says his company, a unit of McGraw-Hill Cos., may have to take a stab at an after-tax return for the S&P 500 and perhaps other indexes. Alternatively, instead of making its own calculations, S&P might consider putting its imprimatur on the after-tax calculations produced by some index funds that track the S&P 500, Mr. Blitzer says, if the gap between pretax and after-tax returns is consistent enough.

Sybille Reitz, a spokeswoman for the Dow Jones Indexes unit of Dow Jones & Co., says the group has found 'no large demand' for after-tax returns on the Dow Jones Industrial Average and various Dow Jones indexes and won't offer such calculations until more demand arises.

TransNations Investments Creates Niche, Funds

TransNations Investments, the sponsor of the Amidex Family of Funds, filed in February to create two new open-end index funds based on its proprietary indexes tracking cancer-innova-tions and investment-services companies. Also in February, TNI launched the Amidex Israel Technology Fund, based on its Israel Technology
Index, which tracks 35 of the largest Israeli technology companies listed on the Nasdaq.

Having launched its first fund in 1999 -- an index fund tracking the Amidex35 index of 35 Israeli stocks trading in the United States and Israel -- the Amidex fund family is just getting rolling. But it has
an aggressive plan to launch four more funds by the end of the year, and have a total of 12 indexes in calculation.

According to a press release from the company, its Amidex35 fund ranked second in total return for 2000 out of 698 foreign stock funds surveyed by Chicago-based fund-tracker Morningstar Inc. Unlike larger index providers, TNI has not set out to create entire families of consistently constructed indexes that are representative of the wider market. Rather, the firm focuses on nontraditional segments of a marketplace and tailors the methodology of each index to suit the particular area. 'We only like to go into space that no man has gone before. There are plenty of indexes out there. We're looking for areas that have never been indexed or areas that have never -- in our opinion -- been indexed effectively,' says TNI's president,
Cliff Goldstein.

'We wanted to be at the intersection of two very popular investment trends,' Mr. Goldstein adds.'One is index investing, and two is subsector investing. So, we created specialty indexes precisely to meet the market demand for sector-based investment, and now we're taking sector-based investment one step smarter by making it indexed sector-based investment.'

The recent filings to create funds based on its cancer-innovations and investment-services companies indexes are examples of the firm's attempts to transcend traditional sector boundaries. The Amidex Medical DTC Index tracks pharmaceutical, biotechnology and medical equipment companies providing cancer treatments and solutions.

'There are biotech indexes, and there are pharmaceutical indexes. There are major drug indexes. But no one has ever indexed cancer as an industry. One of the reasons it's difficult is it crosses so many different category, sector and style boxes that it hurts your head. You go from $200 billion companies to $10 million companies, some that are old and pay dividends, and some that are new and will never sell a product. That's the challenge,' Mr. Goldstein says.

While there is certainly an appeal in investing in the biotechnology stocks that appear in the index, many people are also emotionally invested in the idea that these companies are making progress in the fight against cancer, Mr. Goldstein says. For them, investing in the index might have a certain element of social responsibility.

The index itself is representative of the flexibility with which TNI constructs its methodologies. While the Amidex35 and Israel technology indexes are weighted by pure market capitalization, the cancer innovations index is different. TNI identified three subcategories within the index--pharmaceutical, biotechnology and medical-equipment companies -- and looked at them separately.

'Basically we put together three baskets in a larger basket,' says Mr. Goldstein. 'You can't use market- cap weighting across the board, because if you do, you'll end up with 99% of the fund in the top five drug companies, and there'll be no representation for biotech or medical equipment.'

Equal-weighting each company also doesn't make sense, Mr. Goldstein adds. Why give equal weight to a giant such as Merck and a small biotech company? As a result, the pharmaceutical companies are weighted separately by market capitalization, as are the medical-equipment companies, but TNI decided that approach didn't work for biotechnology companies 'because the stocks are so speculative that market cap is irrelevant,' Mr. Goldstein says. 'It's not a good way to decide which companies represent the industry.'

Like the cancer-innovations index, the company's financial-services index is another attempt to zero in on a subsector. The Amidex Financial Services Index provides coverage of the largest companies in the asset-management and broker-age segments of the financial-services industry.

'There are zillions of financial-services indexes. They're a dime a dozen, and they lump together everything from insurance to banks to mortgage companies to mutual-fund management companies,' Mr. Goldstein says. He notes that interest rates have a much more direct effect on banking and mortgage-lending companies than on brokerage companies.

TNI filtered the financial sector for companies that were involved in investment banking, brokerage services and mutual-fund management. 'Sooner or later, you,the investor, are going to pay someone for help. If you're a do-it-yourselfer, then you're probably going to pay an online broker-age; if you're a traditional investor, you're probably going to pay a traditional brokerage firm; if you're going to try an end-run through mutual funds, then you're going to pay a mutual-fund management company. I don't care which one you're going to use; I just know you're going to use one,' Mr. Goldstein says.

The resulting index's performance correlates to overall financial-market trading volume, he says. 'It will do better when the market goes up, but also when the market goes down. Because of trading activity, the index will do better than interest-rate-sensitive stocks during bad times for interest rates,' he adds. Other indexes available from TNI or currently in development include the Amidex Triple i Index and a security index. The triple-i index covers U.S.-listed stocks from Israel, India and Ireland -- countries that are at the forefront of technology export. The security index, still being developed, will cover companies involved in personal, home and commercial security. Amidex's primary purpose is to create funds based on its own proprietary indexes, but it will license those indexes to other purveyors of financial products.

'Generally, we're not interested in creating an index that can't be used for a product,' Mr. Goldstein says.

Media Firm Launches More Indexes, Then Puts Its Index Unit Up For Sale

Individual Investor Group, a financial-media company, added two more indexes to its previous single offering, then announced its index unit was on the block.

IIG has managed one index--the Americas Fastest Growing Companies Index--for several years. A 500-component index of high-growth, small-cap stocks, it was licensed last year by Nuveen Investments for use as the basis for an exchange traded fund.

In March, the company rolled out two more indexes: the America's Fastest Growing Companies LargeCap 50 and the America's Fastest Growing Companies MidCap 300. The two indexes have similar methodologies to that of the original one. On the same day, IIG stated that it was interested in selling its index business. Among possible options, the company is considering spinning off the index business, selling revenue-participation rights or selling the intellectual property outright, according to a press release.

On March 7, the company received notice from Nasdaq that its stock may be delisted because it fell below the market's $1 minimum bid price requirement. In late January, the company cut its workforce by 20%, to 60 employees, in an effort to cut costs and boost 2001 earnings. Gregory Barton, chief financial officer and general counsel of IIG, says the company believes separating the index business would be a way to increase shareholder value.

'The media business and index-licensing business are really two different animals,' Mr. Barton says. He adds that because of the 'mechanistic' nature of the indexes' methodologies and with no index committees to maintain, the operating expenses are minimal, and licensing fees would thus be highly profitable.

The fast-growing company index bases its universe on companies with market values ranging from $100 million to $2 billion, from which the 500 stocks with the strongest per-share earnings growth are chosen after passing certain liquidity screens. Every quarter, the stocks ranking among the lowest 10% for earnings growth are dropped from the index and replaced with the non-components in the universe with the highest growth.

The index doesn't have an upper limit for market cap, which is unusual. 'We keep the winners,' Mr. Barton says. 'Once a stock joins, it will stay in the index regardless of how large its market capitalization gets, provided it doesn't fall out on one of the quarterly rebalancings.'

The mid-cap index is calculated in the same way, except it draws from a universe of stocks ranging from $2 billion to $20 billion and has 300 components. The large-cap index starts with 100 companies that have the highest absolute net income from operations. From this list, the 50 companies with the highest per-share earnings growth are chosen as components.

Stock Market Jitters Don't Slow Flood Of Exchange Traded Funds

Despite the choppy, declining stock market, new exchange traded funds continue to be rolled out, though lately more of them are outside the United States than within it. Certainly, the two main ETF managers --Barclays Global Investors and State Street Global Advisors-- have not slacked off in their campaigns to expand their ETF product offerings.

Barclays Global Investors' new U.S. offerings include three iShares funds launched in the first quarter. The Goldman Sachs Technology Index Fund began trading in March and tracks the 200- stock Goldman Sachs Technology Sector Index. The Nasdaq Biotechnology Index Fund began trading in February, as did the Cohen & Steers Realty Majors Fund.

The iShares Cohen & Steers Realty Majors Fund is the first exchange traded fund to track the Real Estate Investment Trust sector. The index upon which it is based is a modified capitalization weighted index composed of 30 REITs.

BGI has also filed with the U.S. Securities and Exchange Commission to introduce five ETFs tracking fixed-income indexes. (See related story, page 12)

In Canada, BGI launched six new funds in February. It markets its Canadian ETFs under the 'iUnits' brand name. The new funds include the S&P/TSE 60 Capped Index Fund; S&P/TSE Canadian MidCap Index Fund; S&P/TSE Canadian Energy Fund; S&P/TSE Canadian Information Technology Fund; S&P/TSE Canadian Gold Index Fund; and the S&P/TSE Canadian Financials Index Fund.

In the Asia Pacific region, BGI plans to cross-list six of its AMEX-listed iShares MSCI country funds on the Hong Kong Stock Exchange sometime in the second quarter. The funds to be cross-listed track MSCI's Australia, Japan, Korea, Malaysia, Singapore, Taiwan, and China (free) indexes. BGI is also developing a local product for Australia, though Australian investors can legally invest in U.S.-domiciled iShares funds as foreign investments, a BGI spokeswoman said.

BGI originally was responsible for the only three products trading on the London Stock Exchange's ETF segment, the extraMARK. It has now increased its U.K.-based product list to seven funds with the introduction of four ETFs tracking pan-European sector indexes from Bloomberg. The four funds, branded iBloomberg, are the European Technology, European Pharmaceuticals, European Telecoms and European Financials. The funds are also trading on the Amsterdam stock exchange.

State Street Global Advisors continues to research possible products to add to i t s StreetTRACKS fund family, according to Gus Fleites, the SsgA principal in charge of the compa-ny's ETF operations. In particular, it hopes to launch mid-cap style ETFs tracking the Dow Jones U.S. Style Indexes. Last year, it launched funds tracking Dow Jones Indexes' large- and small-cap growth and value indexes.

Much of its development efforts have been devoted to actively managed ETFs, though Mr. Fleites says those will not be coming out any time soon. Of the uneven stock market and its effect on ETF launches, Mr. Fleites says: 'If it was a traditional fund, I'd agree (that it was an unfavorable environment for new funds), especially if you were looking to launch a product into the retail marketplace. But what we've actually seen with ETFs, given the chop-piness of the market, is that interest has been very much sustained. I think it goes back to the point that we're really not selling the product strictly to the retail market, but more to the intermediaries. And from an intermediary's per-spective, what they're looking for is a well-diversified, low-cost product that they can be comfortable invest-ing in, as opposed to some of the more concentrated and aggressive funds out there.'

Last year, SSgA announced that it would be launching 14 ETFs tracking MSCI's European regional and sector indexes sometime in the future. The fund company expects those funds to begin trading on the Euronext exchange in May. SSgA's activities in the Asia Pacific region involve a variety of countries. It plans to launch two products in Australia in May or June and will also be introducing an ETF tracking Singapore's benchmark Straits Times Index on the Singapore stock exchange at about the same time. Mr. Fleites says his firm has also been in discussions to create products in Taiwan and Japan.

'I think the big challenge facing the industry right now is not so much the specific environment in one particular market, but how do you take a U.S. fund and list it and sell it in a different forum and a different marketplace,' Mr. Fleites says. He cites regulatory issues as a major impediment.

ETF Assets Surge, Crowding In On Closed-End Funds' Turf
(from The Wall Street Journal)

Although their total assets still pale in comparison with regular mutual funds, exchange traded funds are grabbing a sizable chunk of U.S. investment money these days.

ETFs in the United States issued a net $10.8 billion of new shares in December, up 35% from November, according to the Investment Company Institute, a Washington industry trade group. In its first statistical release on ETFs, the ICI said these pooled investment vehicles, whose shares are bought and sold on stock exchanges like publicly traded companies, had total assets of $65.6 billion at the end of 2000.

That is tiny in comparison with the nation's mutual funds, which had combined assets of just under $7 trillion at the end of last year. But ETFs, most of which trade on the American Stock Exchange, continue
to grow rapidly in popularity with investors.

At the end of December, there were 80 ETFs in the United States, all of them stock-index funds, meaning their portfolios are made up of stocks that track various indexes. Together, ETFs in December attracted nearly as much new money as stock mutual funds, which received $11.58 billion of net new money, according to the ICI.

The ICI started tracking exchange traded funds last September. But according to data from research firm Strategic Insight, which also tracks another form of traded funds called trust-issued receipts, these investment vehicles nearly doubled their assets over the past year, rising to $70.8 billion at the end of 2000 from $35.8 billion at year-end 1999.

ICI economist Brian K. Reid said there isn't any evidence that ETFs are competing with traditional mutual funds for investors' dollars. In fact, stock mutual funds attracted a record $309.34 billion in net new money during all of 2000.

Instead, the ICI sees ETFs as another product contributing to the shift of investment dollars out of directholdings of stocks. So far, exchange traded funds are proving most popular among institutional investors,while mutual funds are largely held by retail investors. However, closed-end funds are feeling the crunch. 'There's no question that the popularity of exchange traded funds has drawn potential investors in closed-end funds away from that group,' says Thomas J. Herzfeld, a Miami investment advisor who specializes in closed-end funds.

While both closed-end funds and ETFs trade all day long on a stock exchange, closed-end funds are actively managed. According to Lipper Inc., closed-end funds had $145.8 billion in assets as of Nov. 30, the latest date for which figures are available, up only 2.7% from year-end 1999. ETF assets nearly doubled in 2000.

U n l i k e c l o s e d -e n d s , exchange traded funds can continually issue or redeem shares, so they are more likely to trade close to the net asset values of their portfolio holdings. Closed-end funds, by
contrast, usually trade at premiums or discounts to their net asset values. This difference makes ETFs more popular with investors who are worried about getting in and out of certain sectors easily.

Closed-end funds won't disappear anytime soon, but change is undoubtedly afoot. Consider the activity at John Nuveen & Co., an investment-management company that manages $73 billion, about 40% of which is in closed-end funds. Last year, its Nuveen Investments arm hired Gary Gastineau, a financial-products developer who was one of the executives who brought ETFs into the limelight at the American Stock Exchange.

Mr. Gastineau, who now heads ETF product development at Nuveen, acknowledges that ETFs make it harder for new closed-end funds to enter the market, and suggests that someday most existing closed-ends (except for certain asset classes such as municipal bonds) will be converted to the ETF format.

'Right now, you can't do (ETFs) with an actively managed fund, and closed-ends are all actively managed,' he says. 'It's going to take some time, but can you get there with equity funds? I think so.'

Big Board To Start Trading In Other Exchanges' ETFs

The New York Stock Exchange, which listed its first exchange traded fund in December 2000, announced in early April that it will begin trading ETFs on the basis of unlisted trading privileges. 'The addition of these products to the NYSE will open them to the deepest pool of liquidity in the world. This will enhance the product's desir-ability to both institutional and retail customers,' said NYSE Chairman and CEO Richard A. Grasso.

The funds to be traded include the SPDRs tracking the S&P 500, the QQQs tracking the Nasdaq 100 and the Diamonds tracking the Dow Jones Industrial Average, all of which are listed on the American Stock Exchange.

While approval from the Securities and Exchange Commission is not necessary for ETFs traded on a UTP basis, the exchange must file amendments to its rules to facilitate the trading of the new products. The NYSE has not previously traded any securities that use another exchange as their primary exchange.

The exchange said it hopes to begin trading the funds by June. They will join the NYSE's only other ETF, the iShares S&P Global 100 Index Fund. AMEX spokesman Robert Rendine said the AMEX doesn't think it will lose signifi-cant volume in the three ETFs to the NYSE. 'The depth of liquidity and the quality of the market here is unsurpassed,' he said, noting there are now 97 ETFs listed at the AMEX. 'We've done very well, and we're going to continue to do very well.'

Mr. Grasso stressed that the NYSE isn't looking to trade individual stocks that are primarily traded at other markets. 'We're not about to UTP Microsoft,' he said, referring to Microsoft Corp., a Nasdaq stock market issue that the NYSE has coveted for years.

BGI And Nuveen Race To Bring First Bond ETFs To U.S. Market

As 2001 began, two exchange traded fund p r o v i d e r s a l m o s t s i m u l t a n e o u s l y announced plans to launch what each hopes will be the United States' first exchange traded funds based on fixed-income indexes. Barclays Global Investors and Nuveen Investments Inc. are racing to the marketplace.

Nuveen Investments is waiting for final regulatory approval on the Fixed Income Trust Receipts, or FITRs, that will track the Ryan Treasury Indexes, calculated by Ryan Labs, and will cover 1-year, 2-year, 5-year and 10-year Treasury issues and 20-year Treasury STRIPs.

'The Treasury market is highly liquid and relatively transparent, but it can still be difficult for investors to negotiate,' said Gary Gastineau, Nuveen's managing director of ETF Product Development, in a press release. 'These new ETFs will make buying and selling Treasury securities as convenient as buying and selling stocks. They will benefit both retail and institutional investors.'

The indexes upon which the funds will be based are designed to reflect the risk/return characteristics of on-the-run (OTR) Treasuries, according to the press release. OTR Treasuries are the most recently auc-tioned Treasury security for a designated maturity. OTR rates are appropriate benchmarks for U.S. dollar-denominated debt because they are often used as base yields against which many debt instruments are evaluated, the press release said.

Meanwhile, ETF giant Barclays Global Investors has filed with the U.S. Securities and Exchange Commission to introduce five ETFs tracking fixed-income indexes. As of the end of the first quarter 2001, BGI was still in the quiet period for these funds.

Last year, the fund provider introduced the world's first fixed-income ETFs in Canada.

Four of the five new fixed-income funds planned by Barclays will invest in Treasuries, and one will invest in government and investment-grade corporate bonds, according to the company's filing. The new funds, under the iShares brand, will be the 1-3 Year Treasury Index Fund; 7-10 Year Treasury Index Fund; 20-plus Year Treasury Index Fund; Treasury Index Fund and Government/Credit Bond Index Fund. Each fund will track the Lehman Brothers index that represents its asset class.

The feasibility of fixed-income ETFs once was questioned because many bonds aren't heavily traded and are therefore often difficult to price throughout the day. Moreover, many bond indexes include thou-sands of securities, which makes tracking them accurately a difficult proposition. Both BGI and Nuveen will limit the number of securities in their ETFs.

AMEX And Euronext Announce Venture To Cross-Trade ETFs

The American Stock Exchange and Euronext, the entity created by the merger of three European exchanges, unveiled a joint venture that will list and trade U.S., European and other exchange traded funds. The exchanges said the venture will be a part of a global network of ETF marketplaces.

The move will give Euronext a much larger investor base for its new market segment, known as NextTrack, which was launched in January. The AMEX, a subsidiary of the National Association of Securities Dealers, is the world's largest marketplace for ETFs and the second-largest floor-based exchange in the United States behind the New York Stock Exchange. Pending regulatory approval, the venture will be launched later this year, but AMEX declined to put a fixed date on the start.

Euronext will be the exclusive European partner for cross-trading AMEX-listed ETFs, and AMEX will be the exclusive American partner for cross-trading Euronext's Trackers listed on NextTrack, the exchanges said.

Both Euronext and the American Stock Exchange see a possible extension of their alliance to cover other products, such as equities and options. Amex Senior Vice President Lawrence Larkin said that he could see the alliance being extended to include option products that could be cross-listed in the United States or shares listed on Euronext finding a cross listing. 'That would be a natural expectation,' he said. However, representatives of both exchanges stressed that there currently are no concrete plans for expansion.

Last June, the AMEX announced a joint venture with the Singapore Exchange to form a separate company to trade AMEX-listed ETFs in Singapore. The ETFs will be fully fungible with cash settlement in U.S. dollars, and the venture will market the ETFs on a pan-Asian basis. The AMEX expects to begin trading ETFs through the Singapore joint venture on May 4.

The first products to be cross-listed include the S&P 500 SPDRs, the DJIA Diamonds, the iShares S&P 500 Index Fund, the iShares MSCI Singapore Index Fund, the iShares S&P Europe 350 Index Fund and the iShares Dow Jones U.S. Technology Sector Index Fund.

'This launch will mark the first global and fungible ETF trading network. It will provide both retail and institutional investors with their first opportunity to trade ETFs across the North American and Asian time zones,' said Salvatore F. Sodano, AMEX chairman and CEO.

New Volatility Indexes Focus On Nasdaq 100 And Related ETF
(from The Wall Street Journal)

On the same day in January, the Chicago Board Options Exchange launched its new technology volatility index, the VXN, and the American Stock Exchange started its new options-volatility index for the technology sector, the QQV, based on options on the Nasdaq 100 exchange traded fund (QQQ).

Here's where it gets confusing: While the AMEX's QQV measures the implied volatility of the QQQ options, the CBOE's VXN gauges the implied volatility of options on the QQQ's underlying index, the Nasdaq 100, which trade under the symbol NDX on the CBOE.

The QQV 'provides, for the first time, a snapshot of investors' expectations about the future volatility of the new economy stocks,' said Salvatore F. Sodano, the AMEX's chairman and chief executive officer.

Options traders and money managers have eagerly anticipated the new indexes. Until now, the most widely used market sentiment measure has been the CBOE's Market Volatility Index, or VIX. This established benchmark measures prices of certain Standard & Poor's 100 index options to gauge how traders and money managers feel about the stock market. But while the S&P 100 contains a sprinkling of tech names, it functions more as a broad-market indicator that isn't specific to the tech sector, which lately has been marching to its own drummer.

'This divergence signaled a need for a new measure of volatility to help investors to make more informed trading decisions,' CBOE chairman and chief executive William J. Brodsky said in a statement.

The AMEX's new QQV measures the implied volatility of hypothetical, constant-maturity, one-month, at-the-money options and is expressed as an annualized standard deviation of returns. This means that a QQV reading of 50, for example, would suggest that traders and market managers expect the ETF trust's net asset value could be 50% higher or 50% lower than the current level over the next year.

The AMEX began tracking the QQV on Sept. 27, 2000, and as of January, the index ranged from a low of 42.86 to a high of 75.40. On an intraday basis, the QQV has been as high as 82.41, according to the exchange.

The CBOE's VXN is similar in structure to VIX. It uses real-time NDX index-option quotes to measure volatility in the technology sector. Tabulating it as far back as 1995, VXN has hit readings as high as 93 and as low as 18. Over the past two years, VXN has tended to range roughly between 35 and 60.

In Europe, Higher Costs Restrain ETFs From Taking Off As In U.S.
(from Dow Jones Newswires)

Exchange traded funds have penetrated European markets and are currently traded on the London, Amsterdam, Paris, Frankfurt,Zurich, and Stockholm stock exchanges. But some observers say that the new vehicles won't become as successful as they have in the United States until portfolio expenses decline.

At first glance, European ETFs do seem to have lower expenses than mutual funds. Annual total expense ratios for ETFs in Germany are around 47 basis points, compared with 100 basis points for German index-tracker funds and 158 points for actively managed equity funds in Germany, according to London-based fund research company Fitzrovia International. Numbers are similar in the United Kingdom, with ETF total expense ratios at 45 basis points, compared with 102 for indexed funds and 141 for actively managed funds. Moreover, ETFs have no entry fee, compared with a 3% to 6% front-end load for most mutual funds across Europe.

In the United States, by comparison, downward pressure on costs and high volume have driven the total expense ratio down to about nine basis points for Barclays Global Investors Services funds tracking the S&P 500.

ETF providers such as Merrill Lynch & Co. and Indexchange I n v e s t m e n t A G , a u n i t o f Hypovereinsbank AG, say they will bring costs down in Europe as the products become popular. 'As soon as ETFs get bigger, prices will come down,' says Isolde Regensberger, director of equity markets at Merrill Lynch. 'First, it will be 30 pips, then 15 pips.'

However, in the United Kingdom --arguably the most developed mutual fund market in Europe-- independent financial advisors are reluctant to recommend ETFs over other cost-effective index-tracker funds. For example, Jason Hollands, an advisor at Bestinvest Brokers PLC, cites a closed-end fund tracking the U.K. All Share Index offered by Tribune Indexing Shares PLC. It has an annual management fee of 12.5 basis points and no front-end load. He said, 'To have yet another fund structure, while we welcome that change, it will take awhile before it takes off.'

Indeed, Mr. Hollands still advises his clients to go with active-fund managers. 'I'm not so sure you can consider a tracker (fund) low-risk,' he said, noting that some large companies in the FTSE-100 such as Vodafone Group PLC (VOD) and BP Amoco PLC (BP) constitute 10% or more of the index. 'An active fund manager can't go over 10%, and an aggressive one wouldn't go over 5%.'

Similarly, in the Netherlands, another well-devel-oped mutual fund market, ETFs aren't always the lower-cost choice. Dutch mutual fund giant Robeco Group NV (N.ROB) offers actively managed funds with annual management fees as low as 50 basis points, with no front-end loads.

On the other hand, says Peter Jeffreys, managing director of S&P Index Services Europe, ETFs may attract the attention of Europeans waking up to the now-diversified world of retail investment. 'Passive strategies are starting to take hold in the retail market,' he says. 'Investors are disappointed with active funds and paying high management fees. There's a general move towards a more cost-conscious approach to investing.'

The biggest players in Europe are Merrill Lynch and Barclays Global Investors, which calls its products iShares and is the market leader in the United States.

Merrill Lynch offers ETFs in Paris, Amsterdam, Frankfurt, and Zurich, tracking the Dow Jones Stoxx 50 Index, which contains stocks from 16 equity markets in Europe, and the Dow Jones Euro Stoxx 50 Index, composed of stocks from 10 eurozone countries. Barclays provides seven ETFs in London and four in the Netherlands. They track the FTSE 100, the FTSE TMT, the FTSE Ex-UK, and four pan-European Bloomberg sectors covering technology, telecommunications, financials and pharmaceuticals. The pan-European ones are traded on both bourses.

Germany's Indexchange Investment has five ETFs on the Frankfurt exchange, following the DAX, the Dow Jones Stoxx 50, the Dow Jones Euro Stoxx 50, German midcap stocks and the Neuer market. Eight new pan-European sector ETFs are expected to launch this spring, according to a Deutsche Börse spokesman.

While most of Indexchange's current customers are institutional, the spokesman said he expects increasing numbers of retail investors will see the benefit of ETFs. Indeed, as the culture of personal money management spreads across the world, it takes less and less time for institutional practices and trends to filter down to retail investors. 'The retail use of passive strategies will gather apace as it has at the institutional level,' says Mr. Jeffreys of S&P.

Deutsche Börse, Porsche Face Off On Quarterly Earnings Reports
(from The Wall Street Journal Europe)

As of this year, Deutsche Börse requires companies listed in its indexes to file quarterly earnings reports; previously, companies weren't required to file earnings reports at all. The change is part of the stock market operator's aim to eventually reflect regulatory guidelines used by the U.S. Securities and Exchange Commission. But Porsche, the auto maker, isn't playing along. 'We've already said many times that we don't intend to file quarterly reports,' Porsche spokesman Manfred Ayasse says.

Statements like that could put the Stuttgart-based luxury-car maker in a tight corner. 'Companies that categorically refuse to file quarterly reports will be excluded' from the exchange's indexes, said Deutsche Börse board member Christoph Lammersdorf.

Deutsche Börse is negotiating with Porsche, but Mr. Lammersdorf didn't say precisely what the exchange plans to do if Porsche refuses to budge. 'We'll have to rethink,' he says, stopping short of saying Porsche will be kicked out of the MDAX index.

Previously, the reporting rule only applied to companies listed on the Neuer Markt growth market and in the SDAX index for small-capitalization stocks trading on the Frankfurt Wertpapierbörse. Now, blue-chip stocks in the DAX 30 index and the 70 midsize stocks in the MDAX index must fall in line as well. With a market capitalization of about three billion marks (1.5 billion euros), Porsche is one of the heavyweights in the MDAX index.

Porsche, whose fiscal year ends July 31, currently files semiannual reports. Mr. Ayasse says there are two reasons for Porsche's rejection of the new rules. The car business is very cyclical, he said, so the shorter the reporting periods, the higher the risk that investors could make wrong assumptions based on the figures. The other reason, he adds, is Porsche's skepticism about the increasingly hectic pace of stock market activity. It isn't good for private investors if the market reacts to every piece of news about a company, including quarterly earnings reports, he says.

Some investors believe Porsche needs to be careful. Gerald Roessel, portfolio manager at Invesco Fund Managers, says, 'Porsche can't afford to be kicked out of the MDAX' because that index is a stepping stone to the DAX 30.

Kerstan von Schlotheim, a portfolio manager at Commerzbank AG mutual-fund subsidiary Adig, agrees: 'Membership in the MDAX is important.'

European Exchange AllianceIntroduces First Of New Indexes

The first waves of several new indexes p r o m i s e d b y exchanges of the Norex alliance --OM Stockholm Exchange, Oslo Bors and C o p e n h a g e n S t o c k Exchange-- made their debut in January and February.

OM Stockholm Exchange in January was the first of the Norex members to introduce sector, industry-group and all-share indexes. As of April 12, it will introduce a new benchmark index with about 80 components. The exchange also has announced that it will cease to calculate its old index family, the SX General Index and its industry indexes.

The Oslo Bors, on Feb. 2, introduced its sector and industry group indexes as well as an all-share OSEAX index. The exchange's old indexes will continue to be calculated and disseminated for a transitional period. The exchange has said it later plans to launch the benchmark OSEX of about 70 liquid shares, a capped version of the OSEX, a small-cap index containing the smallest 10% of the exchange's stocks and the OBX index of the 25 most-traded shares.

Norex announced last year that member exchanges would introduce their own series of industry indexes based on the four-tiered Global Industry Classification Standard (GICS) developed by Morgan Stanley Capital International and Standard & Poor's, as well as revamped all-share and benchmark indexes.

Despite launch-day technical problems on the Oslo exchange, the new indexes received a warm welcome.

'For many investors, the (old) Total Index was an inadequate benchmark, due to limited liquidity in some shares. The new index has volume limitations and other features that make it easier to get a good picture of this market,' one trader said.

Other improvements to the indexes of the Norex exchanges include adjustment for free float, maximum weighting limits and the freedom to select constituent companies independently of the type of securities that are listed.

The Copenhagen Stock Exchange, the third exchange in the alliance, has said that it will launch its new indexes and adopt the new classification structure by June 15.

The Norex Index Committee released its final draft of construction and maintenance rules on April 3.

Nasdaq-100 Now Offers 'After Hours' Indicator

The Nasdaq Stock Market launched the Nasdaq-100 After Hours Indicator (AHI) in March.

It followed the introduction in October 2000 of the Nasdaq-100 Pre-market Indicator (PMI), which guides investors on the Nasdaq-100's likely movement when trading opens.

The AHI is calculated in a similar manner to the PMI, except it uses after-hours pricing or, for stocks that do not trade after hours, that day's closing prices. The index is updated every 60 seconds between 4 p.m. and 6:30 p.m.

Both the PMI and AHI were to be added to the Nasdaq Trade Dissemination Service (NTDS) as of April 30, under the symbols QMI and QIV, respectively.

'Historically, information on market sentiment during extended trading has been primarily limited to observation of activity in individual stocks or futures contracts,' said Don Bosic, senior vice president,
Nasdaq Interactive Services. 'Now, with the pre-market and after-hours indicators, it's possible to get a bigger and more accurate picture based on actual trading data.'

Nasdaq also announced that it would cease to calculate the Nasdaq-ADR Index as of April 9. Introduced in 1985, the index tracked American Depositary Receipts traded on the Nasdaq. However, ADRs are now included in the calculation of the exchange's standard indexes.

Morgan Stanley Introduces Global High-Yield Bond Index

Morgan Stanley Dean Witter in February announced the launch of its Morgan Stanley High Yield Core Investable Global (MSHY ci-Global) index series. The series combines global high yield and emerging bond markets and provides daily trader-priced market and performance data.

Subindexes for the series include the MSHY ci-Global Corporate and the MSHY ci-Global Sovereign indexes. At the time of its introduction, the ci-Global Corporate index included 300 securities from 16 countries. Components have an at-issue value of at least $150 million, a minimum maturity of one year and are rated in the top two liquidity categories by traders, Morgan Stanley said.

'The increasing globalization of the high-yield markets created a void in the tools used to measure performance in this sector,' said Patrick McIntyre, principal and head of high yield quantitative strategy
at Morgan Stanley.

'Managers in this sector increasingly look across the entire high yield spectrum, but until now they've had no way to accurately determine how the entire marketplace was performing' and make comparisons across markets in this way, Mr. McIntyre says.

Barclays Global Investors recently chose to use the MSHYci-US Corporate Index of US$-denominated bonds as the basis for a bond index fund, rather than a comparable index from Lehman Brothers that had far more components.

In addition to the 'ci' indexes, Morgan Stanley is also introducing a 'bi' (broad investable) and a 'ti' (trading investable) series. While the 'ci' series is meant as a benchmark for those trading in global high yield markets on a daily basis, the 'bi' series is much broader and will be published on a monthly basis. The 'ti' series is intended as a trading reference and benchmark for swaps and derivative secu-rities and contains far fewer issues.

FTSE News: Social-Responsibility Indexes To Debut In June

FTSE International plans to launch a family of social-responsibility indexes named FTSE4Good. After recovering operational costs, all profits from licensing and other sources will be donated to UNICEF, an organization with which it has had ties since 1996.

FTSE plans to unveil the new, completed indexes at the end of May and 'go live' with them in June. Close Fund Management has signed a license to create funds based on the indexes for both retail and institutional investors. FTSE's New York-based spokesman Michael Gormley says that the firm is in talks with four other firms based in Europe and the United Kingdom.

The indexes weren't 'created for charity,' Mr. Gormley says. 'We saw there is a market for it. There is an element of corporate giving back to the community in the indexes. We wanted to participate in that and thought that giving net profits to UNICEF was a great way to do it.'

The FTSE4Good indexes will cover four regions --the United States, the United Kingdom, Europe and the World -- with both benchmark and tradable indexes for each region.

FTSE has been working with Ethical Investment Research Service (EIRIS), a charity that provides research on the social, environmental and ethical practices of corporations, on the development of the indexes. While the final criteria for component selection have yet to be finalized, FTSE has established three core social responsibility principles. These include the promotion of practices that reduce damage to the environment, respect for shareholders' rights and support and respect for international human rights. The principles were formulated by studying a variety of well-known global conventions and declarations, including the OECD Principles for Multinational Enterprises, the Amnesty International Human Rights Principles for Companies, the CERES Principles and the United Nations Global Compact. The objective is to formulate screening criteria based on globally accepted international standards.

But FTSE emphasizes that it is not pursuing a political agenda. 'What we expect it to do is to encourage corporations to increase their willingness and ability or desire to share information about the things that they're doing,' Mr. Gormley says. Based on preliminary research, FTSE believes that about 50% of the indexes' potential components would fail to pass the screens, according to Mr. Gormley.

'It's not that these companies are bad companies or socially irresponsible companies,' he says. 'We've recognized that most companies don't report or tell what they're doing in these areas; they don't have systems set up. And that's really what we're encouraging more than anything else. It's encouraging socially responsible companies to put it in writing.'

The FTSE4Good Advisory Committee, a 14- member board consisting of academics, practitioners, users and advisors, will determine the final criteria. However, at the committee's request, FTSE has launched a public consultation paper to survey the concerns of potential users of the indexes. The consultation period will end in mid-May.

'The problem with most SRI indices and SRI products, is that they are very niche-focused,' Mr. Gormley says. 'It isn't evident what is considered to be socially responsible and why this company is in but that one isn't. FTSE is known for its transparency; people know what its indexes are all about.'

Mr. Gormley says that the criteria established after the completion of the consultation paper will not be set in stone. 'We will adjust the indexes over the years based on input,' he says, describing them as 'flexible and able to grow and evolve.'

The demand for the indexes came mainly from London and Europe, Mr. Gormley says, but FTSE recognized that 'these products have an attraction on a global basis.'

FTSE Launches Sector Indexes

Like Dow Jones and MSCI, FTSE International is capitalizing on the sector-investment trend. In February, the company announced the launch of the FTSE Global Sector Index Series. The series includes 11 indexes drawn from the most popular stock groups in the 39 sectors of the FTSE classification system. They are designed to serve as the basis for investable products.

Each index has its number of components set at 30, 40 or 50 and represents at least 90% of its respective sector. Components are chosen in descending order of market capitalization until the target representation has been achieved. The indexes are free-float weighted and are reviewed on a semiannual basis. During the reviews, the weights of the largest components in each index are capped at 10% if they exceed that amount. Should the combined weight of index components representing more than 5% of the index exceed 40%, a more complex weighting system is applied to the components to ensure diversification.

However, the global sector indexes do not necessarily represent single sectors within the FTSE classification system. For example, while the FTSE Global Banks Index draws its components strictly from FTSE's Banks sector, the FTSE Global Basic Industries Index draws its components from four sectors: Chemicals; Construction and Building Materials; Forestry and Paper; and Steel and Other Metals.

'They're combinations, and the reason is that the purpose of the indexes was to be extremely tradable,' says Mr. Gormley. 'The concept behind them is highly liquid, largecap stock indexes designed specifically for use as the bases for over-the- counter or ETF products. So we had to basically pick those sectors on a global basis that sort of had the most investor interest.'

Merrill Lynch has already launched certificates based on the indexes that are listed on exchanges throughout Europe and Asia. The company also expects to launch exchange traded funds tracking the indexes later this year.

Indexes are calculated for the following global sectors: Autos, Banks, Basic Industries, Energy, F i n a n c i a l s , General I n d u s t r i a l s , Media, Pharmaceuticals, Technology, Telecoms and Utilities.

Other Indexes From FTSE ...

FTSE created another index for the Athens Stock Exchange. The FTSE/ASE SmallCap Index was scheduled to launch in April. It will track 80 small-cap stocks trading on the ASE. FTSE already has the FTSE/ASE 20, containing the exchange's 20 largest stocks by market capitalization, and the FTSE/ASE Mid 40 Index of mid-cap stocks.

In February, FTSE and HSI Services Ltd., a subsidiary of Hang Seng Bank and the manager of the Hang Seng index family, announced that they were in advanced discussions regarding the creation of a real-time, regional index family covering Asia. The indexes potentially would be used as the basis for ETFs and derivatives.

On March 16, FTSE began a consultation exercise investigating the opinions of U.K. investors regarding possible changes to the FTSE SmallCap index. The index provider is considering setting the index's component list at 400 stocks and reviewing it on a quarterly basis, rather than annually. The consultation period ran until the end of April, with its findings to be reviewed in June. Should the changes be implemented, they would bring the small-cap index's structure and review schedule in line with those of FTSE's other U.K. indexes.

CalPERS Adopts FTSE Benchmark

FTSE is continuing to make strides in the United States. A customized version of the FTSE All-World Index has been adopted by the California Public Employees Retirement System (CalPERS) as the performance benchmark for its international equity portfolio. CalPERS will use the index as the benchmark for both active and passive international equity investments. Prior to the adoption of the FTSE All-World Index, the pension fund used a hybrid index combining FTSE and International Finance Corp. data for its
indexed international investments and an MSCI index for its active investments. CalPERS is the largest public pension fund in the United States with $170 billion in assets.

MSCI News: Free-Float Move Spurs Index Adjustment

Morgan Stanley Capital International (MSCI) in February announced several key changes, including a future adjustment to its small-cap indexes, an altered schedule for the rebalancing of its value and growth indexes and the impending discontinuation of the Extended Indices series.

The changes are directly linked to MSCI's announcement in December that it would shift from its current market capitalization approach to a free-float index-weighting system for its Standard Index Series, as well as increase target representation to 85% of market capitalization from the current 60%.

The shift and the change in representation will be made in two phases on Nov. 30 and May 31, 2002. MSCI will begin calculating the new, provisional MSCI Standard Index Series shortly after publication of the index constituents on or before June 30. Provisional indexes will be provided some time after the constituents are published.

In line with the first phase of the combined changes to MSCI's Standard Index Series, MSCI said it will shift its Small Cap Indices to a free-float adjustment on or before Nov. 30. The transition for the Small Cap Indices will be implemented in a single phase, with all included country indexes to be reviewed and rebalanced simultaneously.

MSCI said it also plans to review whether the current classification of companies included in the Small Cap Indices --which are those with a market capitalization of between US$200 million and US$800 million--remains appropriate, considering the shift to a free-float adjustment. MSCI plans to consult with investors on this issue.

Meanwhile, the regular semiannual rebalancing of the Value and Growth Indices scheduled for August and February 2002 will instead take place Nov. 30 and May 31, 2002, respectively. These indexes' components are based on the ratios of stock prices to book values.

MSCI said it will discontinue its Extended Indices, which currently include all companies whose capitalization make up 70% of their respective market's total. This particular index series no longer will be relevant given the increasing coverage of MSCI's target representation in its Standard Index Series.

In further conjunction with the introduction of its enhanced-index methodology, MSCI no longer will assimilate different share classes of an issuer into a single share class. As a result of its new commitment to free-float weighting, a component's unlisted shares will be excluded entirely from the indexes, and other share classes will be evaluated individually for free float and liquidity.

MSCI Bumps Sri Lanka

MSCI said in early March that Sri Lanka will be removed from its MSCI Emerging Markets Free Index and the MSCI All Country World Index Free series as of June. The index provider cited the decline of the size of Sri Lanka's equity market in recent years as a key reason, noting that there is a lack of large and liquid companies in the country. Because of these factors, Sri Lanka no longer provides meaningful diversification for international equity investors in emerging markets. However, the Sri Lanka index will still be calcu-lated on a stand-alone basis.

Other changes to country indexes that will take place at the same time will include the reclassification of Greece as a Developed Market and the addition of the Egypt and Morocco indexes to MSCI's Emerging Markets Free index series.

New Index Services From MSCI

Responding to the sector-based investment trend, MSCI introduced its All Country Sectors service at the end of January. The new service combines the 10 sectors, 23 industry groups and 59 industries of MSCI's Global Industry Classification System with the 76 regions and 51 countries that it covers. It allows for the creation of thousands of more specific indexes, such as an MSCI All Country Asia-Pacific Free Internet Software & Services index or a MSCI Germany Food & Drug Retailing index.

The product is available in three modules --Developed Markets Sectors, Emerging Markets Sectors and Asia-Pacific Sectors --meaning sector indexes are available for regions and countries falling under those designations.

The All Country Sectors service was created in response to the growing tendency for funds to be allocated on the basis of sector rather than solely by geography. As the correlation between market sectors is falling relative to the correlation between countries, the interest in sectors is growing, said Baer Pettit, executive director and head of Europe for MSCI.

According to an MSCI press release, research conducted by Merrill Lynch/Gallup showed that in Europe, 63% of funds are now allocated on a sector basis, as opposed to 22% in 1997.

While Dow Jones and FTSE have introduced new sector-based index families, they are intended for use as the bases for investable products, with methodologies designed accordingly. The new MSCI indexes follow MSCI's standard methodology for benchmark indexes and are simply subindexes within the broader country and regional indexes.

In related news, MSCI also announced that the calculation of its old country-industry indexes and the use of its old industry-classification system would be discontinued as of July 13. However, it will continue to provide each component's old classification designation alongside its new one until the end of 2001 to ease the transition.

In February, MSCI announced the launch of the MSCI Real Time Indices. Real-time versions of 750 MSCI indexes are now calculated every 60 seconds, including the MSCI World and MSCI EAFE indexes, both of which are calculated 23 hours a day. Subindexes also are available at the sector level for individual countries and at the sector and industry group levels for the MSCI Europe and MSCI EMU indexes.

Indexes that are used as the basis for derivatives products, such as the MSCI Euro and MSCI Taiwan indexes, will be calculated every 15 seconds.

S&P News: Index to Track Canadian Royalty Income Trusts

Standard & Poor's announced at the end of March that it would be rolling out a Royalty Income Trust Index for the Canadian market in June. It will be calculated in real time and disseminated through the Toronto Stock Exchange.

An income trust is an investment syndicate that pools its money to buy a cash flow-generating asset, then distributes the cash flow after expenses to its unit holders. The trust does not engage in exploration, development, construction or manufacturing. It focuses on ownership and management with a view toward generating income.

According to an S&P press release, the market value of royalty-income trusts grew to $25 billion at the end of 2000 from $9 billion in 1996. More than 100 royalty-income trusts are listed on the TSE, and seven of them have market caps that exceed $1 billion.

'We have noted a growing demand for a product designed specifically for this type of security and believe that our new index will provide investors with a useful and much-needed tool for developing and monitoring their portfolios,' Glen Doody, S&P's director of index operations in Canada, said in a press release.
Royalty-income trusts were removed from TSE's indexes in 1995 because they are not incorporated entities, as required by the TSE 300 Composite Index rules. In addition to a benchmark index, S&P also will calculate subindexes covering real estate investment trusts and the energy sector. S&P said it expected that there eventually would be exchange traded funds based on the new indexes.

S&P announced that the Chicago Mercantile Exchange and MEFF (the Spanish exchange for fixed-income and equity derivatives) were scheduled to launch futures and options on the S&P Europe 350's financials, information technology and telecommunications services sector indexes in May. The new products are expected to be followed over the course of the next year by contracts on all the other sectors and contracts on the benchmark S&P Europe 350 and S&P Euro indexes.

SSB Goes Public With Indexes Based On Global 'Cap' Ranges

Salomon Smith Barney in March unveiled its Global Cap-Range Index Series. The indexes had been developed years earlier as customization for SSB clients, but they hadn't been publicly announced.

The SSB Global Cap-Range Index Series is described as a family of 'global absolute size-based equity' indexes. The cap-range indexes are float-weighted, like all other SSB indexes, but com-ponents are selected based on their full-market capitalizations. SSB already calculates indexes for more than 50 'off the shelf' market-cap ranges, such as more than $7 billion, $1.2 billion-$1.5 billion, $5 billion-$10 billion, less than $250 million, etc., but more specific customized market ranges are available upon request. Cap-range indexes are available for all sector, country, region, currency and style designations, or combinations thereof.

'Basically we assign each constituent into one of its elemental ranges, and then you can combine ranges to form additional ranges,' says Patrick Kerr, vice president of equity research with SSB. 'We can combine those with sector or currency or style, country or regional criteria, and then that way create a multidimensional matrix of subindexes under the parent BMI index. I don't know how many indexes you could create out of that --it must be thousands.'

SSB's higher-profile size indexes are the large-cap Primary Market and small-cap Extended Market indexes, which are based on the relative size of each component within its domestic market. The PMI covers the top 80% of a country's market, while the EMI covers the bottom 20%. The caprange indexes provide an absolute range that transcends market boundaries. This feature is useful for institutional managers who often are given mandates with absolute ranges, making indexes with relative --and thus changeable-- ranges less accurate representations of their investment universes.

Mr. Kerr cites as an example small-cap man-agers whose mandates require them to invest in universes of companies under $1.5 billion. The cap-range indexes allow the managers to 'put the parameters in a very specific fashion around what pond they fish in,' he says. A full history of the cap-range indexes is available back to 1989.

Tracking Index People


MSCI has hired Christopher Miller as Global Head of Asset Owners and Consultants and Head of Coverage and Client Service for the Americas. Prior to joining MSCI, Mr. Miller was a director at Credit Suisse First Boston. He is based in New York and reports to MSCI President Henry Fernandez.

Nigel Cresswell, formerly a senior consult-ant and actuary with Dr. Dr. Heissmann GmbH, has joined MSCI as a senior manager, respon-sible for consultants and asset owners in conti-nental Europe, excluding the Netherlands. He is based in Frankfurt, Germany, and will report to Christopher Miller and Baer Pettit, the head of MSCI Europe.

Mr. Miller and Mr. Cresswell were hired as part of an effort by MSCI to be more attuned to the opinions and needs of institutional investors.

MSCI also has hired Michel Serieyssol as global head of its hedge fund index business. MSCI announced that it was developing the MSCI Hedge Fund Indices last year through a partnership with Financial Risk Management. Mr. Serieyssol is responsible for all commercial and operational aspects of the hedge fund index business. He is based in London and reports to MSCI's global director of business development, Richard Quigley. Prior to joining MSCI, Mr. Serieyssol was managing director and head of European prime brokerage servic-es at Bear Stearns.

In February, FTSE International appointed Michael Lim as managing director, FTSE Asia Pacific. Mr. Lim is based in Hong Kong and is responsible for developing FTSE's index busi-ness in the region. Before joining FTSE, Mr. Lim was director of investor dervice at Standard & Poor's Rating. Prior to that, he worked for Dow Jones for 12 years.

State Street Global Advisors appointed

Ronnie Vaknin as senior investment manager with its U.K.-based passive-equity team. Mr. Vaknin reports to Rick Lacaille, head of the U.K. structured-product group. Mr. Vaknin joined SSgA from Barclays Global Investors, where he was an index portfolio manager for five years, managing BGI's U.K. pooled index fund and 30 segregated U.K. funds, among others.

Dow Jones Indexes has hired Pat r i c k McDonaghas the director of business devel-opment for Canada. Mr. McDonagh is responsi-ble for promoting and supporting existing Dow Jones products, as well as developing new licensing opportunities in the Canadian market-place. Prior to joining Dow Jones, Mr. McDonagh spent six years at the Toronto Stock Exchange, first as the manager of index- and derivative-product development and then as the manager of institutional business develop-ment (equities).

Kevin Pilarski has been hired as the regional director for the Americas by STOXX Ltd. Based in Chicago, Mr. Pilarski is responsi-ble for licensing and marketing Dow Jones STOXX indexes to investment-management companies, financial-services companies and exchanges throughout North and South America. Prior to joining STOXX, Mr. Pilarski was the vice president of sales and relationship management at eSpeed, an electronic order-matching system developed by Cantor Fitzgerald. He has served as senior manager of institutional international marketing at the Chicago Board of Trade, and he has more than 15 years experience in the derivatives industry. He also has organized and managed propri-etary trading operations for Stafford Trading, LFG, LLC and Cooper-Neff and Associates. Mr. Pilarski graduated from Miami University, Oxford, Ohio, with a bachelor's degree in finance and economics.

Tracking Index Research


This new column is devoted to synopses of research and other serious writing involving indexes. For inclusion in this column, authors or publishers of the research should submit docu-ments to Heather Bell, Assistant Editor, Dow Jones Indexes, P.O. Box 300, Princeton N.J., 08543, or email to [email protected].

'Critique of Lehman Universal Index,' by Ronald J. Ryan, CFA, published by Ryan Labs Inc., April 9, 2001. The author, who was director of research at Lehman Brothers from 1977 to 1982, designed the Lehman Government/Corporate Index. This index was the accepted benchmark for U.S. bond investors until the Lehman Aggregate Index was introduced in 1986. The Lehman Universal Index was introduced in 1999 and is being pro-moted as the replacement benchmark. Mr. Ryan says that while 'the subsets of this index are indeed an achievement,' the universal index is simply too big at an estimated 6,000-9,000 fixed-income securities. He faults the index for having no restrictions on bond ratings, issuers or size of issue in selecting components. As a result, Mr. Ryan says, risk/reward data generat-ed by the index isn't very useful in asset-alloca-tion decisions. Contact Ryan Labs at 800-321- 2301 or visit

'Best Practice: What Every Fiduciary Should Know About Float Weighting,' published by Salomon Smith Barney, Feb. 23, 2001. The study challenges the phase-in approach that Morgan Stanley Capital International is taking with its adoption of float-adjusted market-capitalization weighting. The paper examines 'index transition risk,' which essentially is timing the changes over an extended transition period to minimize trading

costs; 'benchmark risk,' which is misrepre-sentation of the opportunity set; and 'unfore-casted index composition change risk,' which is quick price run-ups in stocks unexpectedly added to the benchmark. Contact Thomas S. Nadbielny at 212-783-6652, or by email at [email protected].

'I n d e x -L i n k e d E x c h a n g e -T r a d e d Funds' and 'A C o r e /S a t e l l i t e Investment Strategy Using ETFs,' both published by the ETF Research Group of Morgan Stanley Dean Witter, Feb. 28, 2001, and March 8, 2001, respectively. The papers, which provide a comprehensive listing of ETFs as of February, consider various investment strategies that can be executed with currently available ETFs. Among them are core hold-ings, market timing, asset allocation, hedging, cash management and tax planning. The firm makes specific recommendations for core and satellite holdings and sectors, reflecting its strategists' views at that time. Also, the group published separate papers examining tax planning and style investing using ETFs. Contact Paul J. Mazzilli at 212-761-7528, or via email at [email protected].

'F T S E 100 A d d i t i o n s --A v e r a g e R e s u l t s ' and 'FTSE 100 D e l e t i o n s '-- Average Results,' published by the European Quantitative Research Group of Morgan Stanley Dean Witter, London, March 7, 2001. As part of the then-anticipated rebalanc-ing of the FTSE 100 Index in mid-March, the group studied the average results of 69 addi-tions and deletions over 18 rebalancings since September 1995. Contact Raphael Quillaud at 44-20-7-425-6445, or via email at [email protected]

Sectors Added To Global Titans Index Family

The Dow Jones Global Titans index family was expanded significantly in February with the addition of 18 Sector Titans indexes.

This expansion followed close on the heels of the introduction of the Dow Jones Asian Titans index in December 2000. The original Dow Jones Global Titans, a 50-stock index of the world's largest and best-known companies, was launched in 1999.

The DJ Global Titans Index provides investors with the opportunity to track the performance of very large, globally oriented companies, which some experts argue could be classified as a separate asset class. A wide range of investable products has been based on the DJGT, allowing investors to gain exposure to the companies covered in it.

Sector-based investing has grown rapidly in recent years, particularly with the advent of the euro i n Europe. Index p r o v i d e r s have sought t o accommodate this trend by developing more sophisticated
and methodical classification systems. Almost every major global-index provider has restructured its methods of categorizing companies within the past two years. However, the sectors and industry indexes of these global indexes are constructed to represent the market as broadly as possible, not necessarily for efficient use as the foundation for tradable investment products.

The Titans indexes, however, are effective bases for financial products because, although the number of components is limited, the indexes nonetheless show high correlation and low tracking error to related benchmarks. The Dow Jones Asian Titans Index includes 50 of Asia's largest companies. Each of the new Dow Jones Sector Titans Indexes has 30 components.

The Dow Jones Sector Titans index family uses the same methodology as the DJGT and is based on the 18 market sectors in the Dow Jones Global Indexes and Dow Jones STOXX classification systems. As with the DJGT, component companies are selected based on free-float market capitalization, revenues, net income, book value and assets, and the weight of any single component is capped at 10% of the index. A composite index containing all 540 components of the 30 sector indexes also is calculated.

'There are basically two trends in the market here that we're addressing,' says Peter Reitz, executive director of product and business development at Dow Jones Indexes.

'A lot of these companies have g l o b a l o p e r a t i o n s , and i t becomes less and less relevant where they're headquartered or what market they're trading in. Globalization is clearly a trend. And it follows that the business a company is in is more important to its development than the country it's based in.'
There's nothing new about global sectors. They've been a part of most global-index families since the beginning, but they primarily have been used for measurement purposes.

'The new thing here is that we're creating investable portfolios that reflect the development of a global sector,' Mr. Reitz says. 'And that's why we limited the components for each one of them to 30, to make sure only the biggest, most liquid companies are in there, so that it's very easy for some-one to create a product on that index.'

There is considerable interest in the new indexes, Mr. Reitz adds. Four licensees --Dresdner Bank and HypoVereinsbank in Germany and Axa and Societe Generale in France-- are working on DJ Titans-based financial products. Also, advanced discussions are under way with several other financial companies.
Investors should expect exchange-traded funds based on the Sector Titans sometime this year. 'These ETFs will be new in the sense that they cover a sector globally, which right now does not exist,' Mr. Reitz says. 'The only global ETFs today are the S&P Global 100 and Titans 50.'Almost all of the 18 Sector Titans indexes represent at least 60% of the market capitalization of their corresponding market sectors in the DJGI.

'TopCap' And 'LowCap' Indexes Combine U.S. Market Size Segments

Dow Jones Indexes in mid-February unveiled two new indexes to meet the specific needs of institutional investors. The Dow Jones TopCap and LowCap indexes cover broad, overlapping areas of the market, allowing institutional fund managers to use them as benchmarks for portfolios biased toward big-to-medium stocks or medium-to-small stocks.

It was, in fact, the institutional-investment industry that drove the demand that resulted in the new indexes.

'A major consultant --Cambridge Associates-- had requested a reconfiguration of our U.S. Total Market series, saying that they liked the methodology for selection and calculation of the small, mid
and large segments of the U.S. market as opposed to Russell's, Wilshire's and S&P's,' says Albert Neubert, DJI's director of marketing and business development.

What Cambridge and other institutional investment professionals wanted, however, was a combination of the large- and mid-cap segments into one index, which would represent coverage similar to the Russell 1000 Index, a popular benchmark with institutional investors.

'Their view is somewhat of a hybrid view of large and mid together,' Mr. Neubert says. 'And yet, at the same time, they were just as interested in looking at the flip side -- the mids and the smalls put together. There are times when if you look at the large caps, especially the upper end of the large caps, they tend to drive the market. But when they're out favor, it's really mid and small
stocks that are moving it.'

The TopCap Index, which had a float-adjusted market capitalization of $10.7 trillion on March 12, contains all the stocks in the large-cap and mid-cap segments of the Dow Jones U.S. Total Market Index (DJTMI-US). Its 799 components ranged in size from General Electric (GE) at $392.4 billion to CacheFlow Inc. (CFLO) at $93.9 million. The LowCap Index, which had a market capitalization of $3.1 trillion on March 12, contains all of the stocks in the mid-cap and small-cap segments of the DJTMI-US. Its 1,582 components ranged in size from El Paso Corp. (EPG) at $32.7 billion to 3Dfx Interactive Inc. (TDFX) at $8.6 million.

'We believe these indexes will be attractive to investors seeking broad-based alternatives for benchmarking either larger or smaller capitalization stocks, while providing the added benefit of being derived from a comprehensive global index family,' says Michael A. Petronella, managing director of Dow Jones Indexes.

DJ Index-Linked Vehicles Are Launched In Europe

Dow Jones Indexes and Eurex, the international derivatives exchange, announced that Eurex would list futures and options on the Dow Jones Global Titans 50 Index as of April 23. As a result of the agreement, Eurex will be the first exchange in the world to list options on the DJGT 50 Index and the first to list options on a global blue-chip index.

Demand for derivatives based on the DJGT 50 has increased steadily, as more and more investment products have begun to track the index. Eurex also trades derivatives based on the DAX, SMI, Nemax50, Dow Jones STOXX 50 and Dow Jones Euro STOXX 50.

In March, Eurex began trading futures based on eight STOXX sector indexes. The contracts, based on subindexes of both the DJ STOXX 600 and DJ Euro STOXX indexes, cover the banking, technology, telecommunications and healthcare sectors.

With the introduction of the new sector-index futures, Eurex said it was expanding its product line for institutional investors and responding to the growing need for exchange-traded sector derivatives.

At the same time, Euronext, the merged Amsterdam, Brussels and Paris stock exchanges, launched similar futures contracts covering the same sets of indexes, as well as the energy sectors of the DJ STOXX 600 and DJ Euro STOXX indexes.

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