Nasdaq and FTSE Launch New Series of Indexes

July 07, 2005

Nasdaq and FTSE team up to launch four new indexes offering cap-weighted groupings of Nasdaq-listed stocks; ETFs and derivatives to follow soon.

Nasdaq and FTSE expanded their burgeoning relationship on July 7 with the launch of four new partnered indexes offering market capitalization-based breakdowns of Nasdaq -listed stocks.  Three of the indexes will divide Nasdaq-listed names into large, mid- and small cap categories; the fourth index will include the 500 largest companies listed on the exchange.

"This is another important milestone in Nasdaq and FTSE's partnership," said Nasdaq executive vice president John Jacobs and FTSE CEO Mark Makepeace, in a joint statement.  "By sharing our companies' core skills, we've been able to create a unique and powerful set of tools, which access new parts of the Nasdaq market. We are confident the indexes will be welcomed by both institutional and retail investment houses, and we anticipate products based on the series will follow."

It's not hard to envision the utility of products based on the capitalization indexes, which would provide investors with an easy way to capture different slices of the tech-heavy Nasdaq.  The indexes have similar characteristics to the growth indexes provided by companies like S&P, Russell and MSCI, but the Nasdaq indexes offer much greater concentration in the information technology sector.  For instance, technology makes up 57.5 percent of the Nasdaq Large Cap index, and just 27.3 percent of the Russell 1000 Growth index.  As yet, there are no sector-based indexes that offer capitalization-sorted sub-indexes, so the Nasdaq indexes will offer passive investors the first good proxy for investing specifically in small, mid- or large cap tech stocks.  

Of course, much like the New York Stock Exchange's proprietary indexes, the Nasdaq/FTSE indexes will include only Nasdaq-listed stocks, thereby excluding a huge swath of equities from its universe.  This explains the technology concentration in the the qualities of the index reflects the qualities of the equities that trade on the Nasdaq Stock Market.

Interestingly, Nasdaq and FTSE said that the new capitalization-based indexes have outperformed Russell's growth indexes over the past two years. That period covers a strong bull market, however, where the high beta of most tech stocks helped boost returns.  It's unclear how they would perform during a more difficult market window.  But it's not a stretch to say that when tech is outperforming, the Nasdaq/FTSE indexes will do better, and when tech is down, they're likely to underperform.

Compared to the capitalization-based indexes, the utility of the Nasdaq 500 index is much less clear.  Although obviously intended to compete with the S&P 500 Index, the use of 500 names is otherwise arbitrary.  The Nasdaq 500 will largely overlap with the combined large and mid-cap Nasdaq indexes, although it will exclude a small portion of the mid-cap index.  One can imagine investors setting up pairs trades between the Nasdaq 500 and the S&P 500, but not for any good reason besides the superficial similarity of the two indexes having the same number of stocks.

At this time, the companies appear to have decided not to launch a micro-cap index. Taken together, the three capitalization-based indexes exclude the bottom two percent of the market.


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