INDEXING DEVELOPMENTS

November 01, 2006

Emerging Markets Emerge

Vanguard expanded its $9.6 billion Emerging Markets Stock Index Fund to cover Russia and Malaysia, in a move that could turn up the heat on BGI.

Since its inception in 1994, Vanguard’s Emerging Markets fund has tracked a custom-made version of MSCI’s popular Emerg i n g Markets Index, which excluded certain countries due to concerns about liquidity, repatriation of capital and barriers to entry. One by one, however, those “excluded” markets have joined the club. Now that Russia and Malaysia have come on board, Vanguard’s custom index is “effectively the same” as the standard MSCI Emerging Markets Index. As a result, Vanguard will change the fund’s benchmark to the standard index.

How does that impact BGI? For years, the company has justified higher fees on its iShares MSCI Emerging Markets ETF (NYSE: EEM) by noting that it offered more complete country coverage than Va n g u a rd, including exposure to Russia. Now the two funds are substantially identical, and with Vanguard’s Emerging Markets ETF (AMEX: VWO) substantially undercutting the iShare on expenses (0.30 percent vs. 0.75 percent), BGI may feel pressured to lower its fees.

Goldman Gets Real

Goldman Sachs licensed the S&P/Case-Shiller Home Price Indices for use in structured products, as it looks to help high-net-worth investors hedge their real estate exposure. 

Decile Indexes

S&P will roll out new “decile” indexes based on its global Broad Market Index (BMI) series, offering ten market-capitalization segments for each country, region and composite index within the series. Each decile index will include 10 percent of the companies in its segment, not 10 percent of the market cap.

S&P says the decile format offers a more flexible way of segmenting the market than fixed capitalizations or arbitrary numbers of stocks. Of course, dividing into deciles is nothing new: Dimensional Fund Advisors famously uses decile indexes for its popular family of index funds.

CalPERS Drops SsgA For International

The California Pu b l i c Employees’ Retirement System, or CalPERS, dropped State Stre e t Global Advisors from a $13.3 billion passive international equities mandate. The pension plan will take over management responsibilities itself. In addition to saving on fees, CalPERS believes it can add excess returns worth an additional $43 million annually, using quantitative strategies to outperform the market .

In related news, CalPERS announced plans to move into the commodities space for the first time this fall.

Commodities Of The Future

As investors grow savvier about commodities investing, indexers are racing to keep pace. Already, indexers at Reuters/CRB, Deutsche Bank, Lehman Brothers and Merrill Lynch have either tweaked their existing commodities indexes or launched new ones in an effort to provide investors with the highest possible returns. Indexers are especially focused on the “roll strategy,” which governs when and how commodities futures contracts are rolled from one month to the next.

The latest innovation comes from Dow Jones AIG, which will launch three new versions of its popular DJ-AIG Commodity Index, tracking the performance of futures contracts dated one, two and three months ahead. Investors have been moving out on the commodities yield curve recently in order to minimize the impact of “contango” on their returns

New IPO Indexes

Dow Jones STOXX launched a new family of European IPO indexes, tracking the performance of E u ropean initial public offerings (IPOs) held for 3-, 12- and 60 months after their debut. The new indexes are the second European IPO index family, following on the popular indexes from IPOX Schuster, which track the performance of IPOs during their first 1,000 days (four years) on the market. One key difference between the index families is that the IPOX indexes include spin-offs, giving them a large-cap tilt and more stability, while the DJ STOXX indexes exclude all companies with free-float market capitalizations over $3 billion.

In related news, ABN Amro licensed the IPOX indexes for new indexed certificates in Holland, the first such IPO products in Europe.

Global Challengers

In a move designed to pique the interest of product designers, S&P launched a new “Global Challengers 40 Index” tracking the performance of the 40 fastest-growing companies around the globe. The stocks a re chosen from S&P’s list of “Global Challengers,” 300 fastgrowing mid-cap stocks that S&P analysts expect to become worldbeaters in the future. The Global Challengers list selects companies with market capitalizations between $500 million and $5 billion based on four criteria: stock price a p p reciation, sales growth, EPS g rowth and employee count growth. All measurements are made over three years. Surprisingly, the U.S. and Japan dominate the Global Challengers 40 Index, with 15 and 13 firms, respectively.

S&P’s Emerging Style
S&P says it will roll out the “first emerging market style indexes” on November 1. Investors may be particularly interested in the value indexes, as many have expressed concern about a possible “bubble” in emerging market equities.

Vietnam Crosses The Frontier

S&P added Vietnam to its “Frontier Markets” index, a noninvestable index of small, illiquid emerging markets that aren’t ready for prime time. S&P calculates its “Frontier Markets” index on a weekly basis. Through August, the composite Frontier Markets index was trading up nearly 18 percent on the year.

Global Property

Northern Trust unveiled the world’s first index-based global real estate fund, the Northern Global Real Estate Index Fund (NGREX). The new fund tracks the performance of the FTSE EPRA/ NAREIT Global Real Estate Index, which includes more than 300 real estate companies and real estate investment trusts (REITs) in North America, Europe and Asia. The inclusion of real estate operating companies distinguishes the index f rom its peers, which focus on REITs. While REITs dominate the public real estate market in the U.S., real estate operating companies are more prevalent in Europe and Asia. Operating companies have more discretion in their operational and dividend policies than REITS. The fund charges 75 basis points in expenses.

One important benefit of global diversification, according to Northern Trust, is that differe n t parts of the world are at different stages in the real estate cycle. While the U.S. market is retrenching, for instance, Japan is booming.

Completing The Circle

Vanguard (finally) rounded out its U.S. style index fund family in August, launching new funds tied to the Mid-Cap Value and Mid-Cap G rowth indexes from MSCI. Vanguard already offered U.S. growth and value index funds in the large- and small-cap space. The new midcap offerings are available as both ETFs and investor shares.

The tickers are VOE and VMVIX for the value funds, and VOT and VMGIX for the growth funds. The ETFs trade on the Amex. The funds come with Vanguard’s customary and commendable low expense ratios: 25 basis points for the mutual funds and just 13 basis points for the ETFs. According to Vanguard, the ETF fees are half that of their closest competitors.

Vanguard Taps FTSE For Dividend Fund

Vanguard will expand its dividend- based product offerings with the launch of the Vanguard High Dividend Yield Index Fund, slated for the fourth quarter of 2006. The fund will track the performance of the FTSE High Dividend Yield Index, a market-cap-weighted index of high-yielding securities. It will be available as an ETF and a mutual fund, although the fund’s Investor shares will charge a shockingly high (for Vanguard) expense ratio: 40 basis points.

Divvy-ing New Heights

MSCI entered the dividendindexing craze with the launch of its new High Dividend Yield Indices. The new benchmarks are sub-indexes of existing MSCI equity indexes, with screens for high and consistent dividend yields. MSCI noted that the methodology could be applied to any existing MSCI index, including the MSCI World and MSCI EAFE indexes. Look out, WisdomTree…

The Market Yields What???
Dividend investors like to point to the S&P 500’s miserly 1.8 percent yield and laugh. According to S&P, however, if you add in stock buybacks, the S&P 500’s yield jumps to 5.34 percent. Of course, you can’t use a stock buyback to pay for your retirement…

Green Century Gets It

With Amy Domini switching her $1.2 billion Domini 400 Index Fund to active management, Gre e n Century has swooped in to offer investors a real alternative. Green Century’s Domini 400 Index Fund will continue to track the original 400 Index, and is lowering its expense ratio from 1.5 percent to 95 basis points.

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