MSCI Launches Its Provisional Indexes

July 01, 2001

There perhaps has never been anything as anticipated or speculated upon in the invest-ing world as the launch of Morgan Stanley Capital International's provisional indexes. With about $3 trillion benchmarked against its indexes, MSCI is the dominant index provider. The company's announcement in December that it would switch to free-float weighting and expand its coverage to include 85% of the world's float-adjust-ed market capitalization addressed the main con-cerns that most investment professionals had voiced about the indexes. However, trepidation spread rapidly. While most people agreed the changes would improve the indexes, the idea of so much money being shifted around in the markets at the same time seemed a recipe for stock market chaos, not to mention huge transaction costs. But as of early July, more than a month after the launch of MSCI's provisional indexes (the standard indexes will undergo a partial adjustment in November, with the second phase to be completed in May 2002), disaster had yet to occur. Binu George, a principal at Barclays Global Investors, which has tracked the progress of MSCI's index adjustments closely, said the market's response so far is 'underwhelming.''I think the market did a fantastic job of dis-counting some of these changes,'says Khalid Ghayur, MSCI's global director of research. Mr. Ghayur notes that, based on information eleased by MSCI--including a detailed description of its enhanced methodology, available on the MSCI Web site --the vast majority of research was able to provide fairly accurate predictions of the changes to expect. There were few surprises when the provisional index components were announced on May 19. Indeed, the introduction of the provisional index-es created barely a ripple in stock markets around the world. This muted response seems to be due primarily to the fact that market players had five months to research and prepare for the launch of the provisional indexes. 'What MSCI has done is very smart,'says BGI's Mr. George. 'The actual existing indexes do not transition until November, and they are not com-pleted until May 2002. So that means for people who are trying to front-run these changes, it's now an extensive period of multiple months, and if you wait for the entire thing to be done, it goes over the calendar year. That's 12 months. So now all of a sudden you no longer make a big bet for a few weeks and then take your bet off. Now the question is: When do I put it on, and when do I take it off? 'Greg Nordquist, senior consultant at Frank Russell Co., agrees. 'I think the mitigating factor has been that MSCI has really pre-announced and publicized this all pretty well and given a broad timeline for people to move. If everybody trades at different times, it will be hard to detect. I'm sure there will be a blip or two along the way, though. 'MSCI's ACWI (All Country World Index) Free covers 49 developed and emerging equity markets. Its provi-sional version has 2,258 components, while the stan-dard version has 2,066. Despite the increase in com-ponents, the float-adjusted market capitalization of the provisional index at $18.171 trillion is slightly less than the total market capitalization of the standard index at $18.766 trillion. Similarly, the provisional ver-sion of the widely used EAFE (Europe, Australasia, Far East) index has a float-adjusted market cap of $7.195 billion; the standard version has a total market cap of $8.230 trillion. John Carson, a quantitative analyst with Lehman Brothers, said it was the little surprises that provoked the largest market reactions. He cited BMW's unex-pected exclusion from the index and the subsequent drop in its stock price, and the unexpected inclusion of Porsche, which boosted that stock's price.

Rebalancing At Russell
By the time this article appears, the 2001 rebal-ancing of the Russell indexes will have been completed. In their first reconstitution since the 1990s bull market collapsed, some significant,  but not  unexpected, changes were made to the  indexes effective July 1. 'The big changes in 2000 are sort of being reversed in 2001,'said Brad Lawson, senior research analyst with Frank Russell Co., in early June. Cindy Giglio, an analyst with Goldman Sachs, agreed: 'Given what's happened in the last year in the equity markets, in the Russell rebalancing for the most part there is a flip-flop,'she said. Most noticeable was the reordering of the technology stocks. At the end of the reconstitution, the weight of technology in the Russell 2000 Index fell by 4.5 percentage points to 15.7% and in the Russell 1000 Index to 17.7% from 30.6% in 2000. Some of the slack was taken up by the financial-services sector, whose weighting in the Russell 1000 increased by 6.2 percent-age points to 20.4%. The tech wreck pushed many technology stocks out of the growth indexes and into the value category, said Mr. Lawson. Russell makes its style designations based on price-to-book ratios and long-term earnings-growth projections. Mr. Lawson estimated that the technology weighting in Russell's large-cap growth index could fall by as much as 9%. Replacing tech in the growth category are financial services, health-care and  consumer staples, Mr. Lawson said. Tech stocks forced healthcare and consumer staples out of the large-cap growth index in the 2000 rebalancing, he added.

A related phenomenon is that fewer initially offered  stocks are entering the Russell 3000 this year--just 130, down from 302 in 2000, 179 in 1999 and 446 in 1998. Of the new stocks, 108 went into the Russell 2000, representing 4.5% of its capitalization, down from 250 last year, then representing 13.7% of market cap. Only 22 IPOs were added directly to the Russell 1000 this year, down from 70 last year.Ultimately, the Russell 3000 added 527 stocks and deleted 291. The numbers are different because companies that disappear due to mergers or bank-ruptcy filings are not replaced during the year. The Russell 1000 added 178 and removed 120. The Russell 2000 added 609 and dropped 431. The market slump lowered the indexes'market capitalization profile. The Russell 3000's largest stock is General Electric at $486.7 billion; its smallest is Finova Group at $146.8 million. Last year's list had General Electric at the top with a market value of $520.2 billion and Independent Bank Corp. at the bottom with $177.9 million. The market capitalization of the median company in the Russell 3000 fell 7.5%, from $791.1 million in 2000 to $731.8 million this year. In the 2000 reconstitution, the median rose 13%. Also, the cutoff for the Russell 2000 this year is $1.4 billion, down from $1.5 billion in 2000. The annual 'Russell shuffle'is becom-ing more controversial among certain seg-ments of the investment community as more investment capital becomes tied to the indexes. Russell says $177 billion is managed to its indexes including $70 billion against the Russell 1000 and $25 billion against the Russell 2000. Some money managers are calling for more frequent rebalancings to avoid the annual trauma they must endure. 'The intentions are good but the outcome has been bad,'said David Kovacs, a sen-ior portfolio manager at Turner Investment Partners in Berwyn, Pa., which manages roughly $8.5 billion based on strategies tied to the Russell indexes, including some money on behalf of Frank Russell Co. Russell says it has been studying the issue for some time and plans to publish a report soon that examines the potential impact of more frequent reconstitutions. 'We never rule out more frequent reconstitutions,'said Paul Greenwood, head of growth and small-cap research at Russell. However, research suggests that more-frequent rebalancings would cause more turnover of stocks in the indexes, not less.

Further, Russell says the hypothetical indexes rebalanced quarterly and semi-annually showed only a few basis points dif-ference in their performance from the actual index-es. So, Russell believes the benefits of the reduced turnover costs of annual  reconstitution outweigh the few basis points that might be gained through more frequent reconstitutions. From 1979 to 1986, Russell actually did rebal-ance its U.S. indexes quarterly. It switched to semi-annual reconstitution in 1987 and to annual in 1989. Russell said the company's current practice was established as the best trade-off between accurate market representation versus expense and convenience. The company also says its methodology allows the investment community to analyze the impacts of the rebalancing well ahead of the actual changes.

However, some money managers are irked notonly by the large number of stocks shifting amongthe various indexes, but also by big swings in the Russell sector weightings. Technology, of course, is Exhibit A, rising from 14.8% of the Russell 2000 in 1999 to 20.2% in 2000, and now falling to 15.7%. It's an issue for active managers as well as pas-sive. Active managers commonly underweight or overweight sectors in hopes of besting the returns posted by a given index. Last spring, Gretchen Lash, who manages $1 billion in stocks bench-marked to the Russell 1000 for William Blair & Co. in Chicago, positioned her portfolio with 30% less tech than the Russell 1000 growth index. But as last year's rebalancing approached, she realized her portfolio would soon be 50% underweight, an extremely defensive position. This year it was the reverse. She was trying to stay relatively even with the growth index in tech exposure. But with forecasts calling for a drop in the index's tech weight-ing, Ms. Lash was selling tech shares just to stay in place. 'You're somewhat stuck making these big moves,'she said. As a result, ripples from the Russell reconstitu-tion are showing up months in advance of the actu-al index changes. 'People are playing the game earlier,'said Brad Pope, head of the U.S. index group at Barclays Global Investors in San Francisco, which has $60 billion tied to the Russell indexes. 'We started our analysis in February.'
Vanguard Starts Wilshire-Based ETF  Following Loss Of Lawsuit To S&P
(Excerpted partially from The Wall Street Journal, with additional reporting by Heather Bell.)
Vanguard launched the first of its exchange traded fund series called VIPER (Vanguard Index Participation Equity Receipts) shares in the second quarter. However, the new shares weren't the ones that brought controversy to the VIPER concept. Those shares may never be traded because of a recent court decision. On April 25, 2001, Federal Judge Alvin K. Hellerstein of the Southern District of New York granted a request by McGraw-Hill Cos., the parent of Standard & Poor's, for a permanent injunction to bar Vanguard from launching the ETF products based on the S&P indexes. ETFs, which unlike regular mutual funds trade throughout the day on a stock exchange, are one of the hottest investment products around. Vanguard, the second-biggest U.S. mutual-fund group, has been anxious to enter the ETF field with offerings based on its S&P 500 index fund, the largest mutual fund in operation based on assets in all its share classes. McGraw-Hill had argued that Vanguard didn't have the right under existing license agreements to use the S&P name and underlying data on the new products. Vanguard's licensing deals with S&P date to 1988 and are believed to be considerably less lucrative to S&P than more recently negotiated licensing pacts.

Judge Hellerstein agreed with McGraw-Hill in granting the injunction. The issuance of VIPERs by Vanguard would go 'beyond the terms and scope of the McGraw-Hill license, thereby breaching the contract and infringing McGraw-Hill's trademark rights,'Judge Hellerstein wrote. S&P claimed 'total vindication'while a Vanguard spokesman said the company would appeal the decision. The case could have a significant impact on other fund companies that are planning to roll out ETFs, because the decision casts doubt on whether a fund company can add an exchange traded share class to an existing mutual fund without the approval of the index provider. Such approvals are likely to require renegotiating licensing deals and possibly higher fees paid by the money manager to the index provider.

Vanguard had argued that the exchange traded shares weren't new products but just a different form of distributing shares of the existing funds, and thus were covered under earlier agreements. However, Judge Hellerstein noted that at the time the contracts were negotiated and signed, ETFs didn't exist. Vanguard's proposed issuance of VIPERs would 'create a new financial instrument,'the judge wrote. According to the decision, 'McGraw-Hill has been unwilling to license Vanguard to use its index  data and trademarks in connection with VIPERs . . . because of other license agreements' specifically with Barclays Global Investors. Vanguard and its outspoken founder, John C. Bogle, played a large part in making the S&P 500 a recognizable index and pushing index-fund invest-ing as a strategy for individuals. But lately, Vanguard has been suggesting that investors  move more money into its Total Stock Market Index Fund, which tracks the Wilshire 5000 Total Market Index. Vanguard says that fund is a way to obtain exposure to the full stock market in one investment. At the end of May, Vanguard launched the Vanguard Total Stock Market VIPERs, The shares are part of Vanguard's $24 billion index fund track-ing the Wilshire 5000. The shares carry an annual expense ratio of 0.15%, while previously available iShares ETFs tracking the broad-based Russell 3000 and the Dow Jones US Total Market indexes have an annual expense ratio of 0.2%. One month after the launch of the first VIPER, Vanguard announced that it had filed with the SEC to create a VIPER share class for its Vanguard Extended Market Fund, which tracks the Wilshire 4500 Completion Index. The first VIPER was agreed upon in discussions with Wilshire, Vanguard says. A Wilshire spokes-woman says the two companies had a long-stand-ing good relationship. But what of the relationship between Vanguard and S&P? 'I can't speculate, but I think it's pretty clear any time you get in a lawsuit with somebody that your relationship has been damaged,'says Dan Wiener, editor of The Independent Adviser for Vanguard Investors, a newsletter based in Potomac, Md. 'I think it was a terrific calculation on (the part of Vanguard) when they cut the original deal (with  S&P). It was a big miscalculation when they tried to end-run S&P with this share-class business.'Vanguard says the VIPER shares will appeal to more active investors and will benefit the firm's buy-and-hold shareholders by reducing the trans-action costs and potential tax liabilities associated with frequent traders as those investors are drawn into the new share class. But this rationale is 'a red herring,'according to Mr. Wiener. 'The idea that market timers are using these prod-ucts is really not true in any big way,'he says. 'The idea  t h a t t h e y 'v e g o t mass amounts of money trying to time the markets using their regular index funds is just plain wrong.'He says Vanguard simply is trying not to 'lose market share to a segment of investors who are interested in indexing but see the ETF market as a better place for them to do their business.  Vanguard, remember,  has the reputation as being the individual investor's best index shop. You have to be able to compete inthese markets, and that's what Vanguard's doing.'

KLD Licenses Index To Morgan Stanley, Inks Marketing Accord, Drops Wal-Mart
The investment services firm of Kinder, Lydenberg, Domini & Co. is continuing to spread its message of socially responsible investment a decade after the launch of the first socially responsible index fund.

The Domini Social Equity Fund, tracking KLD's first proprietary index, the Domini 400 Social Index, turned 10 on June 3. Beyond that milestone, KLD has crowded the first half of 2001 with several  initiatives. In April, Morgan Stanley Dean Witter Advisors filed with the Securities and Exchange Commission to launch an index fund  based on the KLD Large  Cap Social Index. The KLD index uses the Russell 1000 Index as its universe of stocks. The filing rep-resents the first product to be based on a KLD index that has been licensed by an outside firm. In May, KLD announced a joint marketing agree-ment with Russell/Mellon Analytical Services, a joint venture between Frank Russell Co. and Mellon Financial Corp. The companies will market the KLD family of social indexes, as well as associated per-formance analytics.

In addition to the KLD Large Cap Social Index,  the KLD Broad Market Social Index based on the Russell 3000 Index, and the Domini 400 Social Index, KLD also will be introducing a screened ver-sion of the Russell 2000 Index and several custom indexes. The Russell-based indexes are created by applying KLD's social-screening  process to the Russell 1000, 2000 and 3000 indexes. The cus-tomized indexes have yet to be created and will be deter-mined by market demand. 'We explored the options and the models for new indexes and realized that the Russell methodology and the Russell approach was what we thought was the best one out there. We began working with them on the KLD BMSI, which we launched last January, and we realized that we had a deeper set of com-mon interests in terms of marketing and the social-ly responsible investment market. So we formed a marketing alliance with them,'says Peter Kinder, KLD's president.

Despite the poor performance of most stock indexes in 2000 and the subsequent disenchant-ment of some investors with index investing, Mr. Kinder says KLD continues to see strong demand for socially responsible indexed investment tools and options. 'Institutions that have social accounts really need institutional-grade benchmarks. That was our impetus behind going to Russell/Mellon--because in our opinion there was no one better in the institu-tional- grade market,'Mr. Kinder says. But there was one disappointing change at KLD recently. Wal-Mart Stores--one of the original com-ponents of the 11-year old Domini 400 Social Index--was removed from KLD's indexes as of Feb.  1, though KLD waited until mid-May to announce the change publicly.  'It's a very big deal. This is a company that was right at the top of our index in terms of market cap-italization; it's a company that was an original con-stituent of the Domini 400,'Mr. Kinder says. Wal-Mart's removal stems mainly from vendor-contracting controversies dating back to July 2000, when the National Labor Committee reported recent purchases from Myanmar-based factories by Wal-Mart Canada. The unit has since renounced such buying practices, but Wal-Mart USA has not clarified its own policy, KLD said in the May report. Further, an October 2000 article in Business Week confirmed previous accusations by the National Labor Committee that Wal-Mart had dealings with Chun Si Enterprise Handbag Factory, a China-based sweat-shop guilty of numerous human rights violations. Wal-Mart also rejected the idea of utilizing a third-party monitoring program at its vendors'facilities in Central America, despite the proven effectiveness of such programs, KLD reported. Mr. Kinder says such removals for social reasons are not at all common and generally occur only labout twice a year. 'It's something we don't do casually particular-ly where the screens involved are not exclusionary,   i.e. due to alco-ho l , n u c l e a r p o w e r o r weapons. The non-exclusion-ary areas are ones where we prefer to try to  lobby the cor-poration on the issue and to a c h i e v e change through that effort rather than dropping the company,'Mr.  Kinder says.

While Wal-Mart has been involved in vendor-con-tracting controversies since 1992, it was only after KLD reviewed the company's vendor contracting policies and practices and compared Wal-Mart's progress on such issues with the actions of other companies in similar situations that it decided to remove Wal-Mart from the indexes. Between a third and a half of KLD's total client base, which has diversified holdings of more than $1 trillion, owned Wal-Mart prior to Feb. 1 and about a third to a half of those clients dropped Wal-Mart after it was dropped from the Domini 400, Mr. Kinder said when the report was released in May. Other social investors unaffiliated with KLD also reacted to the controversy by dropping their Wal-Mart investments. Mr. Kinder pointed out in May that KLD is relatively conservative among socially conscious investment advisors and slower to act than others.

At the May announcement, Wal-Mart's stock price was down 7% from the Feb. 1 removal date. As of June 22, the stock was down more than 10% from Feb. 1. While Mr. Kinder says he wishes he could take the credit for the fall in price, he was unaware of the drop and says that such results are not the objective of socially responsible investment.

'The reason people come to social investing first and foremost is they don't want to own some-thing-- nuclear power, for example. They stick with social investing because it gives them leverage through their stock to effect positive social change,' Mr. Kinder says.
'Something like (Wal-Mart's removal) sends a message to the  companies we believe that 'yes, we  want to work with you, and yes, we are willing to engage in long-term conversation with you. But in the end if there is not progress, we're going to drop you, and we're going to drop you publicly.'Because it is crucially important in any kind of effort to effect change that you be public about it,'he adds. 'Wal-Mart will not buy goods produced in a facto-ry that has been denied factory certification based on on-site visits or accounting audits and personal inter-views with the workers. I think all through this we believed strongly that the way to change things is through education and training and not by walking away from the problems,'says Wal-Mart spokesman Tom Williams in response to the controversy. 'We respectfully disagree with the conclusions of organizations and individuals who say we knowingly and continually affiliate with manufacturers who run abusive factories. We look at more than 10,000 a year and have committed significant technological and human resources and capital resources to site inspections,'Mr. Williams adds, noting that Wal-Mart has said it will not have dealings going forward with factories that have been guilty of blatant abuses. Wal-Mart's re-introduction to the KLD indexes, depends not only on creating new policies for deal-ing with vendors, but also the implementation of those policies, Mr. Kinder says.

Busy Days At Deutsche Börse
The Deutsche Börse, one of Europe's most  important exchanges, had a busy second quarter that included launching ETFs and introducing new indexes, among other activities. One of the most significant events was the cre-ation of an integrated market for liquid trading in euro-denominated U.S. equities, ETFs and stock options on the Xetra and Eurex trading platforms. Deutsche Börse and Eurex are partners in the ven-ture, which is expected to begin providing trading and clearing in U.S. securities and instruments in September. Clearstream Banking will provide the transaction settlement services.

The introduction of a market for U.S. investments is part of the  partnership's Global Markets Concept.  Eurex and Deutsche Börse plan to introduce addi-tional segments covering the DJ STOXX blue-chip indexes and the Asia-Pacific region. The Xetra U.S. Stars segment of stocks to be launched in September will contain all the stocks of the Dow Jones Industrial Average, the Standard & Poor's 100, the Nasdaq 100 and the Dow Jones Global Titans 50 (U.S. components only) to create a segment of about 200 equities. The exchange expects the introduction of this segment will create a higher quality market for trad-ing U.S. securities and bring down transaction costs, which will be a benefit when ETFs tracking U.S. equities list on the exchange's XTF segment for exchange traded funds.

Deutsche Börse has been having particular suc-cess with XTF, its ETF market. In April, the seg-ment's turnover increased to 2.1 billion shares, with 93% coming from its index-linked ETFs. The year-old XTF has about 70% of the market share in ETFs trading on European markets. As of the end of the second quarter, it listed 27 ETFs--16 index funds and 11 actively managed funds. ETFs are being launched on a fairly regular basis. April saw the introduction of the Nemax 50 EX ETF, which is managed by Indexchange Investment AG, followed by the launch of the MDAX EX a few weeks later. Eight new funds, also managed by Indexchange and based on the banks, telecommunications, tech-nology and healthcare sectors of the Dow Jones Euro STOXX and Dow Jones STOXX 600 indexes, were launched at the start of May. Eurex, a partially owned subsidiary of Deutsche Börse, already listed futures based on all eight sector indexes. In the second quarter, Deutsche Börse and its partners in the iBoxx index joint venture further expanded the iBoxx series. In late April, the consor-tium launched the iBoxx Euro Corporate Bond indexes, which include investment-grade, euro-denominated corporate bonds issued international-ly by financial and nonfinancial corporations. The family includes subindexes covering five maturity ranges as well as the iBoxx Euro Overall Index, which is a composite of all the bonds included in the iBoxx Euro Corporate series.

The new corporate indexes are part of the iBoxx euro index family, which also includes subindexes covering sover-eigns, subsovereigns and collateralized bonds. In June, the first of the iBoxx £ indexes were launched. The iBoxx £ Gilt indexes cover the U.K. gilt market for bond issues by the British govern-ment in £ Sterling. The iBoxx £ family also eventu-ally will include subindexes covering nongilt gov-ernment bonds, state-guaranteed bonds, collater-alized bonds and corporate bonds denominated in £ Sterling. In addition to Deutsche Börse, the iBoxx consor-tium currently includes ABN  AMRO, Barclays Capital, BNP Paribas, Deutsche Bank, Dresdner Klienwort Wasserstein, Morgan Stanley Dean Witter and UBS Warburg. The seven banks provide real-time pricing for the indexes. In a fairly unusual move early in the second quar-ter, Deutsche Börse delayed the reshuffling of its blue-chip DAX-30 index, which had been scheduled for May 8, in order to make a decision regarding its possible replacement for Dresdner Bank. Allianz Holding had made a general takeover offer for Dresdner, and the index committee decided to wait  until it reviewed the offer before making an announcement.
Marschollek, Lautenschlaeger & Partner, a finan-cial- services group, was under consideration for inclusion in Germany's blue-chip index for more than a year, and its inclusion in the DAX was widely anticipated. While it meets the volume and market capitalization criteria, it was rejected several times in 2000, mainly for subjective reasons. A DAX-30 slot gives a company a higher profile and means more share turnover, with index-tracking funds forced to buy the shares.

The waiting company finally was added to the  index on July 23. After Allianz's offer to Dresdner shareholders expired on July 13, Allianz owned more than 85% of Dresdner's shares. Since Deutsche Börse requires component companies to have free float of at least 15%, Dresdner was removed and its slot taken by MLP.
Meanwhile, Porsche is still looking at expulsion from the MDAX. This is the first year that Deutsche Börse is requiring all its index components to issue quarterly reports, but the automobile com-pany says it has given its final answer and will not be issuing quarterly reports. The company's posi-tion has been that quarterly reports would be con-fusing to investors who do not understand the volatile and cyclical nature of the automo-bile business. The June 30 deadline for reports for the quarter ending April 30 already has passed.

Deutsche Börse has said that it will give its own final answer on the matter after its Aug. 7 index-composition meet-ing, but its decision seems all but certain. 'There will be no exception made for Porsche,'said Christoph Lammersdorf, the exchange board member in charge of stock market operations.  Porsche's apparent unconcern may stem from its stock's recent and unex-pected inclusion in the new Morgan Stanley Capital International provisional indexes. The MSCI indexes are used on a global basis, while the DAX-30 is most popular in Germany.

With the Paris and Madrid stock exchanges also moving toward free-floating their equity indexes, Deutsche Börse released its float-weighting crite-ria on May 9. The new rules will be applied in June 2002. The exchange's float-adjusted weightings will take into account blocks of ownership by a shareholder exceeding 5% of a share class's total share capital. Its definition of block ownership also includes shares that a third party manages for the shareholder's account or that belong to a compa-ny that the shareholder controls, as well as all shares that are subject to a legal or contractual lock-up period of at least six months.

New Exchange Traded Funds
Barclays Global Investors is continuing to cre-ate new iShares, but at a much slower pace than last summer. In the second quarter, it filed with the Securities and Exchange Commission to launch exchange traded funds based on the MSCI EAFE index and four Goldman Sachs tech-nology industry indexes. The Goldman Sachs funds will track the hardware, networking, semiconductor and software industries. The five new funds will trade on the American Stock Exchange. Barclays also has said that it intends to introduce ETFs based on S&P's global sector indexes. The iShares fund family marked its first year of  existence at the end of May. As of May 25, there were 61 iShares in the United States with total assets of $10.3 billion.

In late April, State Street Global Advisors launched another ETF for its streetTRACKS Series of funds. The new ETF tracks the Wilshire REIT Index and trades on the American Stock Exchange. SSgA also launched a new streetTRACKS ETF o n t h e E u r o n e x t exchange in Paris on June 1 9 . The s t r e e t TRACKS MSCI Pan-Euro ETF is the first of what will be several ETFs tracking MSCI indexes. SSgA has 23 ETFs worldwide, with more than $35 billion in assets. On June 4, Merrill Lynch launched two LDRS f u n d s o n t h e L o n d o n S t o c k Exchange's extraMARK segment. The funds, which track the Dow Jones STOXX 50 and Dow Jones Euro STOXX 50 indexes, also trade on the Amsterdam, Paris, Frankfurt and Switzerland  exchanges.

SEC To Issue ' Concept Release'
The Securities and Exchange Commission plans to put out a concept release in August requesting comments from the investment community on sev-eral questions relating to exchange traded funds. The paper will focus mainly on the possibility of actively managed ETFs and the problems associat-ed with creating such products. Other questions to be addressed include whether ETFs contribute to market volatility.

NYSE Delays Launch Of New ETFs
Partly because of technical problems that froze trading operations in early June, officials at the New York Stock Exchange decided to delay the introduc-tion of three new exchange traded funds to their market. The exchange had announced in early April that for the first time it would trade three non-NYSE-list-ed securities: the QQQs, which track the Nasdaq-100; the SPDRs, which track the Standard & Poor's 500-stock index, and the Diamonds, which track the Dow Jones Industrial Average. The three funds already trade on the American Stock Exchange. NYSE officials originally planned to introduce the three ETFs as early as June by having them join its one home-listed ETF, which tracks the S&P Global 100 Index. In recent weeks, two factors caused them to rethink the timing. First, the annual rebal-ancing of the Russell 2000 small-capitalization stock index forced many index-tied funds to rearrange their holdings, spurring volatility and large transactions. Second, the June 8 failure of certain technical systems connecting stock orders by individual investors to traders on the exchange floor halted trading for 85 minutes. 'We're taking a thorough look at what happened on June 8, and that sets (us) back a bit,'said a spokesman for the NYSE, who added that Big  Board  officials had been 'increasingly'hearing trader and institutional-investor concerns about that and the Russell shift in recent weeks. The trading of new ETFs was to have begun in mid-July.

ETFs And Economic Reform In Asia
Exchange traded funds are attracting interest in Asia, where government officials and investment professionals see them as ways to bolster activity on local exchanges and possibly draw more retail investors to the stock markets. 'Several Asian governments have studied ETFs and their potential applications beyond just another investment product,'says Mark Roberts, product strategist with Barclays Global Investors Services. 'This is largely the result of the Hong Kong government's positive experience with their tracker fund (TraHK).'  He adds that 'China, Japan and Korea have all announced plans to study ETFs as a tool for transitioning government or corporate cross-share hold-ings to a broader audience of  investors without the down-ward pressure that would result if these holdings were sold in the market directly.'However, he notes that China recently delayed plans to create ETFs for sev-eral years due to operational issues.

'Whether governments can find an appropriate application for ETFs in financial reform remains to be seen, but their interest in the topic has probably helped speed up reform,'Mr.  Roberts says. The Singapore stock exchange has plunged into the ETF arena through its cross-listing alliance with the American Stock Exchange. On May 4, it began trading five ETFs--including the SPDRs and Diamonds. Investor response to the products was fairly enthusiastic, though the total trading volume of about 36,000 shares was well below normal U.S. levels. AMEX President Peter Quick said that his exchange expects to introduce another 20 to 30 ETFs to the Singapore market within a year.  Hong Kong, home of Asia's first ETF, beat Singapore to market with the May 1 launch of two iShares ETFs from Barclays Global Investors. The funds were based on the MSCI Taiwan and MSCI South Korea indexes. The new funds started trading without any fanfare and had a combined first-day volume of 154,200 shares traded. The two new funds are cross-listed from the American Stock Exchange and are listed in Hong Kong on a 'trad-ing only'basis.
Barclays Global Investors, the sponsor of the two iShares funds, says investor interest should pick up because the underlying Taiwanese and South Korean markets are open when the funds trade in Hong Kong. 'When the funds trade in the U.S., the underlying market is closed, and that makes it a lot more difficult, if not impossible, to track the price,' said Wendy Elwell, head of BGI global cross efforts. Trivia note: The iShare MSCI Taiwan was respon-sible for the first-ever lunchtime transaction in Hong Kong with a trade at 1:52 p.m. The Hong Kong stock market is closed between 12:30 and 2:30 p.m., but the two iShares are available to trade con-tinuously from 10 a.m. to 4 p.m., partly to cater to the earlier close in the underlying Taiwan and South Korean markets. Thailand's stock market also plans to introduce its first ETF, which will track the Stock Exchange of Thailand's SET index and will be managed by Thailand-based SCB Asset Management. In May, the Thai publication The Nation report-ed that the new ETF's launch was imminent.

India is expecting its first ETF soon. Once the product receives final regulatory approval, the National Stock Exchange of India will list the ETF, which tracks the S&P CNX Nifty and is managed by Benchmark Asset Management. Another ETF tracking India's Sensex index is under development; it will list on the Bombay Stock Exchange and be managed by Unit Trust of India. In Japan, ETFs are supposed to become a mar-ket reality as early as July. The country's Financial Services Agency recently approved the creation of four index-based ETFs as part of a series of eco-nomic measures meant to stimulate the country's economy. The indexes are the Topix, the S&P/Topix 150, the Nikkei 225 and the Nikkei 300. At the same time, the FSA suggested plans for a stock-buying institution that would absorb the  shares that will be unloaded by Japanese banks as they reduce their equity cross-holdings. The pro-posed entity would act as a buffer between the banks and the stock market, reducing the possibly destabilizing impact of so many shares becoming available by filtering some of them back to the pub-lic through the ETFs.

According to Asia Pulse, the Tokyo Stock Exchange and Osaka Securities Exchange have drawn up standards for the listing of ETFs. The instruments will trade and settle like regular securi-ties but may be delisted if they diverge significantly from the indexes they are supposed to be tracking. The first of the ETFs should be launched in July. Reuters reported that ETF giants State Street Global Advisors and Barclays Global Investors both plan to launch ETFs in Japan. State Street has said that it will license the Topix, Nikkei 225 and Nikkei 300 for products. Barclays, according to Reuters, said that it was considering launching ETFs on the Topix, Nikkei 225 and the S&P/Topix 150. Barclays has an exclusive license to market ETFs based on the S&P/Topix 150. But three Japanese firms are beat-ing Barclays and State Street to the market. The TSE already has given approval to Daiwa Asset Management and Nomura Asset Management to each list a Topix-linked ETF on July 13. Nikko Asset Management also will list an ETF tracking the Nikkei 225 on the exchange at the same time.

In addition, Nomura and Daiwa both have approval to list ETFs linked to the Nikkei 225 on the OSE on July 13. Barclays'Mr. Roberts said BGI has been investi-gating and working toward the introduction of ETFs in Japan for more than 18 months. 'Much of that time was spent working with the Tokyo and Osaka exchanges and the FSA regarding regulatory changes that would be required for an efficient ETF market to develop,'he says. Because ETFs are fairly new investment products, Mr. Roberts says the creation of an efficient ETF marketplace often requires minor revisions to a country's securities or investment trust regulations and an exchange's listing standards. In Japan, 'these revisions had been discussed and were under review for several months, but a true sense of urgency was not imbued until the Japanese government men-tioned it was considering using ETFs as a part of its financial reform pack-age,'he adds.

On June 19, the AMEX and the Tokyo exchange announced an alliance for the cross-listing and trading of U.S. and Japanese ETFs. The two exchanges will establish a trading plat-form for the products and also jointly undertake marketing and investor-education efforts. The ultimate goal of the alliance is to achieve seam-less 24-hour cross-listing and cross-access of each other's products. On that same day, at a news conference marking the one-year anniversary of the Nasdaq Japan stock market, Nasdaq Chairman Frank Zarb announced his expectation that Japanese ETFs would trade on the Nasdaq and Nasdaq Europe markets, possibly after as short a period as 12 months.
Bond Indexes: J.P. Morgan Changes EMBI Methodology
J.P. Morgan has been making some changes in its Emerging Markets Bond Index (EMBI) series. In May, it announced that it would be changing its methodology with regard to how it handles large debt exchanges. In the case of a significant debt exchange, the affected indexes now are rebalanced intramonth instead of at the end of each month. Morgan defines a large debt exchange as one  that involves more than $6 billion of the face amount of bonds in the EMBI Global index or more than two-thirds of the face amount of any one of the most liquid index bonds.

To ensure that the indexes remain replicable, the intramonth rebalancing will use the closing market prices of the trading day following the final announcement of the results of the exchange, a Morgan press release said. At the time of the rebal-ancing, the EMBI Global and EMBI Global+ will trade the face amount of index bonds actually exchanged for an equal market value of the new bonds issued in the exchange as long as the new index bonds meet the $500 million minimum size requirement. Capitalization will decline to the extent that ineligible bonds are exchanged for eligible ones. The goal of the methodology adjustment is to make sure that the indexes are tracking the main sources of liquidity in emerging markets. Examples include retiring a large volume of a country's index bonds or when a large amount of the most liquid index bond is exchanged for a new  benchmark bond.

The intramonth rebalancing policy was first utilized during  Argentina's $29.5 bil-lion voluntary bond exchange in early June, prompting outcries from some fund managers because J.P. Morgan  was one of seven lead managers on the bond exchange. Fund managers who align
FTSE News: Expansion Under Way In Asia
FTSE International is expanding its presence in Asia. Graham Colbourne, chairman of FTSE Asia-Pacific, said the initial focus is on Hong Kong, Singapore, China and Japan. FTSE's Asian strategy consists largely of con-vincing cash-rich organizations and  companies, such as the Hong Kong Jockey Club, to benchmark their funds against the FTSE indexes. Such moves likely would push fund managers and analysts serv-icing these organizations and companies to shift to FTSE databases and other services. 'Every big fund is a target,'Mr. Colbourne said. After opening a Hong Kong office in January, the index provider has announced major agreements with two firms in the region.

In May, FTSE announced that Nomura Securities, the largest securities firm in Japan, will adopt the FTSE indexes for its domestic and glob-al business and promote the indexes in Japan.  Nomura Securities will use FTSE's global index series and classification system in its research for clients worldwide. It also will market data and licensing rights for the FTSE indexes in Japan and offer related client-support services. In addition, as part of the agreement, FTSE and Nomura Securities jointly will operate a Web site and monthly publica-tion in English and Japanese.

FTSE made major inroads in China with the the FTSE/Xinhua 25 index, which was first launched in Hong Kong in April and is calculated in Hong Kong dollars. It tracks 25 of the largest and most liquid Chinese equities available to foreign investors, including red chips--Hong Kong-incorporated stocks trading in Hong Kong--and H shares, which are incorporated in mainland China but trade on the Hong Kong Stock Exchange. Some of China's B shares--mainland China-list-ed securities available to foreign investors-- may be included in the next rebalancing of the index, should they meet the appropriate criteria, says Jane Staunton, president of FTSE Americas.

On June 28, a U.S. dollar-denominated version of the index was unveiled at the New York Stock Exchange. Ten of the components, representing almost half of the index's market capitalization, have American Depositary Receipts listed on the NYSE, which will allow the index to be calculated during U.S. trading hours. Both versions of the index employ a capping methodology to ensure that the index can be used as the basis for investable products. The New York Stock Exchange and FTSE/Xinhua Index Ltd., the joint venture that manages  he index, currently are looking for sponsors to create an ETF based on the index that will list on the NYSE, possi-bly by early next year. The HKSE is expected to launch a similar product in the fall, and the London Stock Exchange also is interested in creating an ETF based on the index. The FTSE/Xinhua China 25 essentially is the first blue-chip, tradable index covering Chinese securi-ties for foreign  investors. MSCI currently has sever-al  indexes providing different slices of China and its affiliated markets, but they are broad market index-es without the capping feature or selection stan-dards of the FTSE/Xinhua China 25. And the only ETFs available to U.S. investors are the iShares from Barclays Global Investors that track the Hong Kong and Taiwan MSCI indexes.

The FTSE/Xinhua China 25 is the first in what will  be a series of indexes covering the Chinese mar-kets, with index families geared toward both domestic and international investors. It also is the first index to be launched by the FTSE/Xinhua Index joint venture, which is operated by FTSE International and Xinhua Financial Network. 'What first brought about the partnership was the fact that China is a rapidly growing market. There was a lot of interest in China, but there was-n't a lot of information about China for the outside investors,'says Ms. Staunton. According to infor-mation from FTSE, the World Bank has forecasted that China should be the best-performing economy of 2001, growing by a projected 7.3% on the previous year. Also, up to $8 trillion in new wealth in China could become available to foreign investors in the next 15 to 20 years. 'FTSE being in the index business and Xinhua really being a proprietary source of financial infor-mation on the Chinese market, it made sense to pair up and be able to put together real-time indices to deliver performance information to nondomestic investors, so they have a better understanding of the Chinese market,'Ms. Staunton adds.

Moreover, Xinhua Financial Network has the approval of the Chinese government. '(An index is) not really a licensed product, but you need to have proper approval from various regulatory agencies to have an index in China. Xinhua is one of the few companies that have the approval to have an index for the domestic market,'says Jae Lie,  XFN's chief operating officer. FTSE also has extended its reach into Africa through an agreement with the Johannesburg Stock Exchange. The JSE Securities Exchange announced in early May an agreement with FTSE that will provide internationally recognized index products for its domestic and African markets. The agreement will result in the development of an enhanced and expanded index series to be named the FTSE/JSE Africa Series.

However, first FTSE and the JSE will undertake a review with the objective of bringing the exchange in line with international investment standards. It will include the implementation of free float, total return indexes and the FTSE Global Classification System,as well as an expanded range of benchmark and tradable index products. The review process is expected to be complete by the end of this year.
An advisory committee, chaired by Anton Botha, chairman of Gensec Bank Ltd., will oversee the introduction of the new system. In May, a multimillion-dollar mistake sent the FTSE 100, the United Kingdom's main benchmark, into a steep dive. A keystroke error by a Lehman Brothers Holdings Inc. employee in London sent British stocks into a sudden dive late in the trading day on May 14 and cost the firm as much as $6 million in trading loss-es, according to a person familiar with the matter. Though such 'data-entry problems'occur from time to time, this one caused unusual havoc because it occurred minutes before the close of trading, when volume was light. The error turned a Lehman cus-tomer's futures-contract sell order valued at about £30 million ($43.8 million) into one valued at about £300 million ($438 million). That sent the FT-SE 100 Index, already down modestly on the day, falling sharply; it closed down 3.5%. Lehman could have suffered a larger loss, but the next morning it quickly executed trades that effectively reversed the positions taken as a result of the mistaken trade, says the person close to the matter. The FTSE 100 Index regained most of its losses May 15, rising 2.7%, or 152.40 points to 5842.90. A spokesman for Lehman in London declined to comment. 'Little mistakes happen all the time,'says Peter Lewis, global head of program trading at SG Securities in London. 'But they only get noticed on days like this, when there's thin volume, and it has a big impact.'The error involved program trading, which is the efficient execution of a large number of separate stock transactions in a single trade. This particular incident involved most of the components of the FTSE 100, thus the marked effect on the index itself.

The London Stock Exchange investigated whether the error was the result of lax controls at the securities firm involved and eventually concluded that it had indeed been an accident and not an attempt to manipulate the market. FTSE was to have announced on July 10 the components of its FTSE4Good indexes. On the same day, Close Fund Management was to have launched the FTSE4Good UK Fund. The indexes screen components according to generally accepted standards  of corporate social responsibility regarding shareholder rights,  environ-mental sustainability and human rights. They can be customized further by applying screens to exclude companies  involved in tobacco products, nuclear power or weapons manufacturing. The FTSE4Good series is scheduled to go live on July 31.

S&P News: Canadian Venture Index Is Considered
Standard & Poor's is working on a Canadian venture-capital-based index that would include Canadian Venture Exchange-listed companies and possibly some small Toronto Stock Exchange companies, an S&P official said in early April.
'This project is still on the drawing board,' Glenn Doody, director of S&P's Canadian Index Operations, said at a gathering of financial analysts. S&P is investigating issues such as liquidity and size of the marketplace and is continuing discussions with market players before deciding on the index structure, Mr. Doody said. Exchange traded funds, or ETFs, could be launched soon after the index is announced, Mr. Doody said during his presentation. S&P has developed a number of indexes based on Toronto Stock Exchange companies of various sizes and in various sectors.

B a r c l a y s Global Investors Canada has introduced exchange-traded funds based on those S&P indexes, under the brand name iUnits. Barclays currently offers nine of the 12 ETFs available in the Canadian marketplace, Howard Atkinson, Barclay's iUnits marketing manager, said at the analysts'gathering. The Canadian Venture Exchange, which lists jun-ior and emerging companies, already has an exist-ing index and three subindexes. But those aren't suitable for launching an investment product such as an index fund or exchange traded fund because they give equal weight to each company in the index, Canadian Venture Exchange president Bill Hess told Dow Jones Newswires in an autumn inter-view. The issue of companies 'graduating'out of their CDNX listing and onto more senior  exchanges also has to be resolved in the development of any new index, Mr. Hess said at the time.

Income Trust Index Delayed
Standard & Poor's has postponed the launch of its income-trust index in Canada, citing a need for addi-tional time to research the new index and its subindexes, which cover energy trusts and real estate investment trusts. In a June news release, S&P said the new income-trust index, which was originally scheduled to start operating at the end of June, now will be launched in the fall. S&P said the index will be calculated in real-time and will be disseminated through the Toronto Stock Exchange. Components, weights and an index his-tory will be released before the launch, it said.

Product Launches
At about the same time that the S&P/TOPIX 150 Index received approval from Japan's Financial Services Authority to be used as the basis for ETFs in Japan, the FSA also granted approval for the list-ing of futures and options based on the index. The derivatives made their debut on the Tokyo Stock Exchange on June 11. On June 21, index futures and options on futures contracts on the S&P Europe 350 Index and its financial, information technology and tele-com services sector subindexes began trad-ing  on the Spanish futures exchange, MEFF. The products, the result of an alliance between t h e MEFF, Chicago Mercantile Exchange  (CME) and S&P, will clear through the CME Clearing House. Regulatory approval is pending, but CME members and customers are expected to be granted cross-exchange access to  trade the new contracts on the MEFF. Other members of the Globex Alliance, which includes such derivatives exchanges as Euronext, the Singapore Exchange  Derivatives Trading and the Montreal Exchange, will have access to the contracts. The CME has an exclusive license to trade futures and futures options based on the S&P indexes; it has sublicensed the S&P 350 and its sub-indexes to the MEFF. On June 25, S&P launched 12 real-time global sector indexes for Australia's S&P/ASX 200 Index. The index provider already calculates an entire family of indexes for the Australian Stock Exchange.

The new sector indexes are based on the Global Industry Classification Standard (GICS) developed and used by S&P and MSCI. Although the GICS categorizes companies into 10 sectors, two addi-tional sectors have been created for the Australian market. The financial sector index has been broken into two subsectors: financials ex. property trusts and property trusts. S&P says in a press release that the indexes are designed to allow for the cre-ation of products based on them.

Also in June, E*Trade Group Inc. announced an alliance with S&P to develop stock baskets or folios. The products combine the diversification and con-venience of a mutual fund with the control of a bro-kerage account. Five of the 21 funds will be based on stock indexes, while the remaining 16 will focus on industry sectors or investment styles with com-ponent stocks chosen by S&P securities analysts.

Emerging Markets Indexes Rebalanced
On May 1, S&P completed its semi-annual review of the S&P/Emerging Markets Data Base Indexes. As part of an ongoing process, S&P continued to tighten the indexes'screens for investability, broad-en the number of stocks covered and make further float adjustments.  Greece graduated from the S&P/International Finance Corp. Investable and S&P/IFC Global composite and regional indexes. Greek stocks now are eligible for inclusion in the S&P Euro 350 Index.

Colombia, by contrast, has been added to the watch list of countries with small and illiquid markets because it is less than 30 basis points of the S&P/IFCI Composite Index.
Separate indexes were introduced for Hong Kong and Singapore. The indexes will not be includ-ed in the emerging-market composite indexes but are designed according to the EMDB model and S&P/IFCI guidelines. The new indexes round out the S&P Asian family joining the indexes for the 10 Asian countries S&P classifies as emerging markets and the S&P/Topix 150 Index covering Japan.

MSCI News: Futures Listing Starts A Squabble In Shanghai
The Hong Kong Stock Exchange launched futures contracts on the Morgan Stanley Capital International China Free Index on May 7. The contracts made a quiet debut, with only 15 lots changing hands. Stock exchange offi-cials attributed the lack of activity to the normal skepticism one should expect toward any new product, while market participants attributed the lack of volume to poor promotion, an unfavor-able trading environ-ment for futures and the high concentration of the index in just a few stocks. China Mobile represented nearly 60% of the index's weight. However, the new futures contracts didn't escape controversy. S h a n g h a i S t o c k Exchange o f f i c i a l s announced after the launch that they were upset at MSCI for failing to ask permission to license futures contracts based on the MSCI China Free Index for trading in Hong Kong. The exchange, which called an 'informal'meeting with MSCI to discuss the issue some months ago, is  'very dissatisfied'with the way MSCI has respond-ed to its complaint, a stock exchange official says.

The futures contracts are based on an index composed of Chinese stocks that can be pur-chased by any foreign investors. These tend to be primarily Hong Kong-listed mainland compa-nies. However, the MSCI China Free Index also includes some B-share companies, which are listed on mainland exchanges and available to foreign and local investors. It is these B shares o v e r w h i c h s t o c k exchange officials feel t h e y s h o u l d h a v e some control. 'MSCI should first have gotten our permis-sion for selecting our shares,'an official in the information depart-ment of the Shanghai Stock Exchange says.  The official adds that any move to resolve the issue will have to begin with a discussion of w h e t h e r MSCI has 'infringed'the exchange's rights. 'The next step will be to discuss the permission issue,'he  said. At the time of the product's launch, the China Free index included only two B shares, one listed on the Shenzhen exchange and one listed on the Shanghai exchange. A spokesman of the Hong Kong Exchange says it followed standard procedures for introducing new derivatives products in Hong Kong, namely secur-ing the approval of Hong Kong's Securities and Futures Commission.

Inclusion of B-share companies in the index should help share-price performance because fund managers seek to buy stocks based on their weightings. Indeed, Chinese authorities have been keen to encourage foreign institution-al investors to trade B shares in hopes it will attract long-term investors and reduce the influ-ence of Chinese retail  investors in the highly speculative markets.

However, Shanghai officials appear to be more concerned that licensing futures contracts based on the index has afforded MSCI with commercial opportunities in which the exchange should have been able to claim a share. China has no stock index futures or any derivatives market of its own yet, which prevents local fund managers from hedging their positions. As China's capital markets open up over the next few years and the diversity of companies expands, weightings of mainland-listed stocks are bound to increase, analysts say, which could lead to further disagreements. In the second quarter MSCI launched GICS Direct with S&P.

The product provides classificationinformation on 22000 securities using the Global Industry Clasification Standard developed by MSCI and S&P. GICS Direct also will provide other security identifiers such as CUSIPs, SEDOLs and country codes. Updated files will be available to customers on a daily or monthly basis and eventu-ally through  financial information vendors.
Meanwhile, the two index providers will continue to broaden the coverage of the GICS to include even more companies.

Tracking Index People
FTSE Americas recently opened its first office on the West Coast of the United States in San Francisco. Laurie Whetstone was named vice president of sales. Ms. Whetstone will be responsible for manag-ing FTSE's current client accounts based on the West Coast, and she will be the primary person in charge of sales development for the region. M s . W h e t s t o n e j o i n s FT S E f r o m, an Internet company specializ-ing in online advertising and customer-loyalty and -retention programs, where she was the director of strategic partnerships. Prior to that, she was a regional sales manager with Charles Schwab Electronic Brokerage. Dow Jones Indexes'executive director of development and research, Peter Reitz, has been appointed to the Eurex Executive Board, effective Aug. 1. He will be responsible for the business development of the Eurex derivatives exchange. It is also expected that Mr. Reitz will be appointed to the general management team of Eurex Frankfurt at the next meeting of the Exchange Council.  Prior to joining Dow Jones Indexes in March 2000, Mr. Reitz was head of information prod-ucts design at Deutsche Börse. He also was the first chairman of the supervisory board of STOXX  Ltd., the joint venture of Deutsche Börse, the Swiss Exchange, SBF-Bourse de Paris and Dow Jones, which runs the Dow Jones STOXX family of European equity  indexes.

Eurex, the world's largest international deriv-atives exchange, was created in 1996 when Deutsche Börse and the Swiss Exchange merged their derivatives markets.
Lars Hamich has been named the director of European business and product development for Dow Jones Indexes. He will be based in DJI's new Frankfurt office, its fourth in Europe. His goals will include increasing the visibility and usefulness of the Dow Jones  indexes for investors in Europe. Mr. Hamich also will be responsible for overseeing the development and delivery of new indexes based on the Dow Jones Global Indexes for European investors. The Dow Jones European index support team, which reports to Mr. Hamich, also is responsible for the design, development and delivery of the Dow Jones STOXX indexes. Mr. Hamich previously was based in Zurich, where he was head of European product devel-opment for Dow Jones Indexes. Prior to that, he was product manager for index  and information products at Deutsche Börse in Frankfurt. As Deutsche Börse's representative, he also head-ed the Dow Jones STOXX index-design com-mittee and was instrumental in the development and launch of the STOXX index family.

Tracking Index Research
This column is devoted to synopses of research and other serious writing involving indexes. For inclusion in this col-umn, research authors or publishers should submit docu-ments to Heather Bell, Assistant Editor, Dow Jones Indexes, P.O. Box 300, Princeton, N.J, 08543, or e-mail [email protected].
'The Global ETF Investor,'published by Salomon Smith Barney, May 22. The report features summaries of presentations given during a panel discussion at Salomon Smith Barney's 11th Annual Closed-End Country Funds Conference and Global ETF Forum. The panel, titled 'Slicing the World: The Country Versus Sector Allocation Debate,'focused on the migration of funds from coun-try- based investment approaches to sector-based approaches. Also included in the  report are performance and valuation tables on the iShares MSCI funds. Contact Michael Porter at 212-816-3451 or via e-mail at [email protected].

'The Benefits of Index Option-Based Strategies for Institutional Portfolios,'by Thomas Schneeweis and Richard Spurgin, published in The Journal of Alternative Investment, Spring 2001. The authors address the findings of previous studies showing that investment strategies utilizing index options tend to improve the performance of equity portfolios. Using data replicating passive index option-based strategies for a 13-year period, Professors Schneeweis and Spurgin find that such strategies outperformed the underlying index and that the outperformance of strategies utilizing index options is not nec-essarily dependent on the skills of active man-agers. The article provides an in-depth exam-ination of the source of this added return. Contact Institutional Investor Journals at 212- 224-3066. Morgan Stanley Dean Witter's North American Equity Research Group published several reports on ETFs in the second quarter.

'Index-Linked Exchange-Traded Funds,'published May 22, 2001. Distributed on a quarterly basis, this report provides a comprehensive view of the ETF universe. In addition to data and portfolio  information on more than 100 U.S.-listed ETFs, the topics addressed include strategies, investment opportunities, analyst opinions and  informa-tion on the construction and important features of ETFs.

'A Core/Satellite Investment Strategy Using ETFs,'published June 7. The report suggests using ETFs in an investment strate-gy that features core holdings in broad index-es and satellite holdings in style and sector investments. The core holdings in broad-index investments reduce overall risk while the allocations to sector- and style-based satellite investments are rotated with the intention enhancing performance. The report also features comprehensive tables of U.S.-listed ETFs classified by style, sector and country.

'Implementing MacroScope Strategies With ETFs,'published June 13. This report takes recommendations from Morgan Stanley strategists and demonstrates how ETFs can be used to implement those strategies. Because of the somewhat limited range of currently available ETFs, the examples pro-vided focus on countries and U.S. sectors. The report also provides pricing, perform-ance and fund data on the various ETFs men-tioned and comprehensive tables of U.S.-list-ed ETFs classified by style, sector and coun-try.

'ETF Strategy Guide,'published July, 2001. This guide highlights and summarizes several strategies utlizing ETFs that were detailed in previously published reports. The five reports featured in the guide address a range of investment-diversification and tax-planning issues.
'Exposure to the S&P 500 Index in a Single Security,'published May 28; 'Offering Investors Broad Mid-Cap Exposure,'May 28, and 'Access the DJIA as a Broad Market Proxy in One Stock,'published June 6. These three fund updates cover the iShares S&P 500 Index Fund, the iShares S&P MidCap 400 Index Fund and the DIAMONDS ETF, respectively. Each report provides a list of the fund's positive and negative features, portfolio breakdowns, data, valuations and management and perform-ance information. Contact Paul Mazzilli at 212-761-7528 or via e-mail at [email protected].
DJI Launches Portfolio Index Series
There have been lots of index es to measure the performance of every asset class but nothing to measure the overall performance of diversi-fied portfolios. Until now. Dow Jones Indexes and The Quantidex Group have created the Dow Jones Global Portfolio Index Series. The family consists of five risk-based indexes. The main index, the Dow Jones 100% Global Portfolio Index, is an all-equity index covering about 85% of the world equity mar-ket float-adjusted capitalization. The four remain-ing indexes are designed to capture 80%, 60%, 40% and 20% of the risk and return of the main index by including different proportions of bonds and cash in the portfolio allocation. 'Every portfolio, no matter what it is invested in, has a spot on a risk/return graph,'says Rodney Alldredge, a consultant with Quantidex and the co-creator of the DJGPI Series with George Daniels. 'To control your portfolio, you have to know where that spot is. The portfolio index-es are a tool that will help you no matter how large or small your portfolio.'The new indexes will  help people judge 'if they have gotten appro-priate return for the amount of risk that they've taken to get that return,'Mr. Alldredge adds.

The allocations are based upon indexes for 14 asset classes that fall under three broader classifi-cations: stocks, bonds and cash. Mr. Alldredge calls them Composite Major Asset Classes (CMACs) because they represent groups of assets that have the same  fundamental financial structures and, sub-sequently, a more predictable long-term risk/return relationship regardless of short-term performance. The equity CMAC includes nine Dow Jones indexes covering the U.S. large- mid- and small-cap value and growth segments, Europe/Canada, Asia/Pacific and the emerging markets.

The nine indexes are weighted equally within the equity seg-ment. Mr. Alldredge was consulted in the develop-ment of the six style indexes; he also was responsi-ble for the development of the emerging-markets index that is used in the DJGPI series and which uti-lizes a normalized market-capitalization weighting system.

Cash is represented in the portfolio indexes by the Lehman One- to Three-Month T-Bill Index. Bonds are represented by the Lehman Brothers Corporate Bond, Government Bond, Mortgage Bond and Majors (excl. U.S.) indexes. As with the equity seg-ment, the four indexes representing bonds are weighted equally. The Lehman  Brothers indexes were chosen because of their broad use within the investment community and because of Lehman's good reputation.

'They are not intended to represent an optimal amount of return for risk taken but a reasonable amount of return for risk taken,'Mr. Alldredge says. 'They're an index of indexes. It's the only way you can handle this much data because it's really the most diversified index that I know of.'The stock, bond and cash allocations of the indexes are rebalanced every month, based on the percentage of risk of the main index. The adjustments are deter-mined by optimizer soft-wa r e c r e a t e d b y Quantidex. While it is common to apply set allo-cation standards, such as 70% s t o c k s v s . 30% bonds, to investment portfolios, the risk rela-tionship between stocks and bonds changes. In the DJGPI series, the index named the Dow Jones 80% Global Portfolio Index does not necessarily have 80% of its assets invest-ed in stocks.

The underlying structures of the three CMACs remain the same among all the portfolio indexes, no matter what their risk level. The different levels of risk are achieved by adjusting the allocations of assets to the three CMACs. In other words, the bond segment of the 80% risk index is structured exactly the same as the bond segment in the 20% risk index, but the bond segments themselves rep-resent different percentages of the two indexes. 'We adjust the risk, not by putting less in emerging markets or less in small cap, but by put-ting less in equity,'Mr. Alldredge says. 'The only assumption made by this whole plan is that, over time, stocks will have more risk and return than bonds; bonds will have more risk and return than cash. If you assume that's a fundamental truth, then the rest of it works. It's an asset-allocation index. It is a way to measure the success of asset allocation strategies.'

The DJGPI Series grew from work done earlier by Messrs. Daniels and Alldredge. As consultants, they created early versions of the portfolio indexes for their clients, mainly pension plans. The DJGPI Series is aimed primarily at pension plans, though the indexes would be useful for any investors seeking to measure the perform-ance of portfolios invest-ed in global assets, Mr. Alldredge says. In partic-ular, they would be useful as the core investment in a pension plan portfolio or as replacements for lifestyle funds in 401(K) plans. He also notes that the index family is an entirely unique product. 'The portfolio indexes are a new concept in indexing, not merely a new index. There are fixed-allocation indexes, but none of them are  published. Nobody intends them as a standard for asset-allocation strategies,'he says. 'This is a standard.'Currently, Quantidex is the only licensee for the portfolio indexes. The firm acts as a subadvisor for a fund family based on the indexes that is managed by State Street Global Advisors. However, there will be no mid-cap segment in the State Street funds until they attract more assets. About $100 million now is benchmarked against the portfolio indexes.

New ETFs Launched in Europe
The first exchange traded funds based on Dow Jones indexes other than the Dow Jones STOXX index family have been launched in Europe on the Euronext Paris exchange. In May, Societe Generale launched the Dow Jones Master Unit ETF, which tracks the Dow Jones Industrial Average. It is the first ETF based on a U.S. index to trade on a European exchange. AXA launched Europe's first global ETF this year when it introduced the EasyETF Global Titans 50 Fund on April 25. The fund tracks the Dow Jones Global Titans 50 Index, which is calculated almost 24 hours a day because it has component stocks in Asia, Europe and North America. On the same day, AXA also launched ETFs based on the Dow Jones STOXX 50 and Dow Jones Euro STOXX 50 indexes; those funds also trade on Euronext Paris.

DJI Launches U.K. 50 Index
Dow Jones Indexes launched the Dow Jones U.K. Titans 50 Index on June 12. The index, which tracks 50 blue-chip U.K. companies, is calculated in £ Sterling and U.S. dollars. The index is being promoted as an alternative to the U.K.'s most widely used benchmark, the FTSE
100. The DJ U.K. Titans 50's top holdings include BP Amoco, GlaxoSmithKline, and Vodafone Group. 'The DJ U.K. Titans 50 Index offers much lower costs for managers and investors looking to track the U.K. blue-chip equities market,'said DJI's man-aging director, Michael Petronella. 'Coupled with the Dow Jones Euro STOXX 50 Index, the DJ U.K. Titans 50 Index provides an easy and efficient way to cap-ture the entire U.K./European equities market.'The new index is part of DJI's blue-chip Titans series of indexes and one of five Dow Jones Country Titans Indexes that are available. The other indexes in the family track the Australian, Hong Kong, Japanese and Canadian markets. DJI plans to release more blue-chip indexes for individual developed markets.

Dow Jones Expands Emerging Markets Coverage
On June 18, Dow Jones Indexes completed the expansion of its emerging-markets indexes by increasing the coverage of the 11 emerging mar-kets in the Dow Jones Global Indexes to 95% of float-adjusted market capitalization from 80% of float-adjusted market capitalization. ' This major step will provide individual and institu-tional investors with a broader and thus more effec-tive tool to measure the markets on a global scale. As the developed markets in our Dow Jones World Index cover 95% of the underlying market capitaliza-tion already, our index family now becomes consis-tent across all markets,' says Michael Petronella, managing director of Dow Jones Indexes.  The countries that Dow Jones Indexes desig-nates as developing or emerging markets are: Malaysia, Indonesia, the Philippines, South Korea, Taiwan, Thailand, South Africa, Brazil, Chile, Mexico and Venezuela. The increased coverage boosted the number of components in the emerg-ing markets to 824 from 608. The total number of stocks in the Dow Jones World Index increased to 5,046 from 4,801. Except for the difference in emerging-market coverage, Dow Jones Indexes had applied the same methodology to developing markets as it did to developed ones. 

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