INDEXING DEVELOPMENTS

April 30, 2008

S&P Doppelganger

Standard & Poor's recently launched the S&P 500 Inverse Index. The index tracks the returns of a short position in the S&P 500 Index, or rather, the inverse of the S&P 500's total return. Although borrowing costs are not included in the index, it does incorporate the effect of interest earned on collateral and on the profits from the short selling of the components of the S&P 500.

The index is designed to be a benchmark and to underlie investable products, particularly in Europe and parts of Asia, where S&P says that companies require an actual index tracking inverse performance in order to launch inverse tracking funds. S&P says more inverse indexes are on the way, as well as leveraged indexes.

DJ Wilshire Adds Markets

Dow Jones Indexes and Wilshire Associates announced that three new countries will be added to the Dow Jones Wilshire Global Index family, bringing the total number of countries covered by the Dow Jones Wilshire Global Index family to 61, and the total number of emerging markets to 33.

Bahrain, Kuwait and Sri Lanka started being included in the global index series March 24, following the index's first quarter review. All three are classified as emerging markets. In addition to the creation of new individual country indexes, the change will affect the Dow Jones Wilshire Global Total Market Index, Dow Jones Wilshire Global ex-US Index and Dow Jones Wilshire Emerging Markets Index. Bahrain and Kuwait will also be incorporated into the Dow Jones Wilshire Middle East & Africa Index, while Sri Lanka will enter the Dow Jones Wilshire Asia-Pacific Index. Dow Jones projected that the change would ultimately result in the addition of eight Bahraini, 69 Kuwaiti and 18 Sri Lankan companies to the Dow Jones Wilshire Global Total Market Index last March.

Russell Launching Global Style

New indexes to slice and dice global stock markets are due out from Russell Investments on April 1.

Russell says the Russell Global Large Cap Growth Index and Russell Global Large Cap Value Index will represent segments of the Russell Global Index. The indexes will approach style at a global level rather than country by country. They are designed to include float-adjusted market capitalization, annual reconstitution and multifactor style analysis.

ESG India Index

Standard & Poor's recently launched a socially responsible index covering India's stock market in cooperation with KLD Research & Analytics, a socially responsible investing research firm, and CRISIL, a leading research firm in India.

The S&P ESG India Index, which is governed by environmental, social and governance (ESG) standards, is the result of a competition sponsored by the International Finance Corporation, a member of the World Bank Group.

IFC sold S&P its original emerging and frontier markets family of indexes.

The S&P ESG India Index draws its 50 components from the 500 largest stocks listed on the National Stock Exchange of India Ltd. They are chosen based on their quantitative and qualitative scores in the areas of ESG transparency and disclosure. The S&P ESG India Index rose 65.09% in 2007, outperforming the S&P CNX Nifty Index, which was up 56.80%.

DJ Launches Dharma Indexes

In January, Dow Jones unveiled an index family designed to meet the investing needs of more than 1 billion people—roughly one-fifth of the world's population.

The Dow Jones Dharma Indexes was developed with Dharma Investments, target members of the Dharmic religions—Hinduism, Buddhism, Jainism and Sikhism—and reflect the values held in common by them.

The family includes five indexes— a global benchmark and four country indexes covering the United States, the United Kingdom, Japan and India. The indexes are monitored continuously and reviewed on a quarterly basis. Components are determined through a series of industry, environmental, corporate governance and qualitative screens established and maintained by a group of committees and advisory groups that are made up of experts in finance and Dharmic religions.

FTSE Envirotech

FTSE recently launched the FTSE ET50 Index, which covers the world's top environmental technology companies. It was developed jointly by FTSE and Impax Asset Management, an investment management firm specializing in the environmental sector.

The 50 components are selected from a universe of 500 stocks determined by Impax. All of the selected components are pure-play environmental technology companies representing categories such as alternative energy and energy efficiency, water technology and pollution controls, and waste technologies and resource management.

The FTSE ET50 Index is part of a trend. Indexes focused on ecology themes, many with ETFs based on them, have been cropping up fairly steadily in the last couple of years. WilderShares, KLD, HSBC and Standard & Poor's have all recently launched ecologically oriented indexes.

According to FTSE, the FTSE ET50 Index is just the first in what will be a series of indexes that FTSE will develop with Impax.

S&P Launches International Dividend Indexes

In February, Standard & Poor's launched the S&P Dividend Opportunities Indexes. The new series provides exposure to high-yielding stocks for income-oriented investors. It currently includes a global index and a global ex-U.S. index called the S&P Global Dividend Opportunities Index and the S&P International Dividend Opportunities Index, respectively.

The investable universe for the indexes includes all listed dividend-paying stocks and American Depository Receipts (ADRs), with certain restrictions on components regarding volume, primary exchange, value-traded and market capitalization. Components meet profitability and earnings growth requirements. Eligible stocks are ranked according to their dividend yields, with the top 100 selected for inclusion. Components are weighted to achieve maximum yield while still complying with cap-weighting limits.

Shortly after the launch of the indexes, the SPDR S&P International Dividend ETF (AMEX: DWX) began trading on the American Stock Exchange. The new fund charges 0.45% in annual expenses.

Schwab Adds To RAFI Lineup

Charles Schwab & Co. launched two new index mutual funds based on Rob Arnott's fundamental benchmarking system. The funds compete against ETFs offered by PowerShares that use the same indexes, and for the most part offer lower expense ratios.

The Schwab Fundamental International Small-Mid Company Index Fund (SFIVX) has an investor share class expense ratio of 0.79% per year, but it's not so cheap. The fund mirrors the same benchmark as the PowerShares FTSE RAFI Developed Markets ex-U.S. Small-Mid Portfolio (AMEX: PDN), which charges 0.75%.

The investor share class of the Schwab Fundamental Emerging Markets Index Fund (SFEMX) actually features a lower expense ratio. It charges 0.84%, while its rival, the FTSE RAFI Emerging Markets Portfolio (AMEX: PXH), charges 0.85%.

The cost differences become more pronounced when comparing Schwab's two other share classes. For a minimum purchase of $50,000, "select" shares are available for each fundamental mutual fund in Schwab's fund family. At those levels, costs drop 15 basis points (0.15%), meaning both of the new funds are cheaper than the corresponding PowerShares ETFs.

An initial purchase of $500,000 or more costs even less: 0.55% per year for the emerging markets fund, and 0.60% for the developed markets fund. The new funds join three others launched in April 2007: the Schwab Fundamental U.S. Large Company Index Fund (SFLVX), Schwab Fundamental U.S. Small-Mid Company Index Fund (SFSVX) and Schwab Fundamental International Large Company Index Fund (SFNVX).

Similar PowerShares ETFs can be found for each, and all the Schwab funds sport lower expense ratios in their various share classes.

ProShares Launches Mutual Funds

Here's something a little different: ProFunds has launched a mutual fund. After building a lineup of some 58 mutual funds over nearly a decade, the firm slowed to just two new mutual fund launches last year, even as its sister unit, ProShares Advisors, released a barrage of ETFs.

The new mutual funds track China's once-booming stock market. The UltraShort China ProFund (UHPIX) seeks daily results that correspond to twice, or 200%, the inverse of the daily performance of the Bank of New York China Select ADR Index. The UltraChina ProFund (AMEX: UGPIX) seeks to gain twice as much, or 200%, of the same Bank of New York benchmark.

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