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News Dow Jones Sells Stoxx Indexes Deutsche Boerse and SIX Swiss Exchange announced in November that they are buying out Dow Jones’ one-third stake in Stoxx Ltd. for a consideration of 206.1 million euros, or $306 million. Stoxx was set up as a joint venture between Deutsche Boerse, Dow Jones and SIX Swiss Exchange in 1998 in anticipation of the introduction of the euro and the creation of the eurozone. Stoxx is Europe’s leading index provider in the ETF market and Europe’s No. 1 (world’s No. 2) provider in the derivatives market, according to the company’s Web site. A number of U.S.- listed exchange-traded funds are tied to the company’s indexes as well. Following the transaction’s completion, which is due to take place in early 2010, Deutsche Boerse will have a controlling stake in Stoxx of 50 percent plus one share and will fully consolidate it for accounting purposes. In addition, SIX and Deutsche Boerse will set up a new entity to perform index calculations, in which SIX will own 50 percent plus one share. According to a Stoxx press release, the transaction will allow both Deutsche Boerse and SIX to significantly expand their positions in the international index business, complementing their established DAX and SMI index families. The sale could be a precursor to the long-rumored sale of Dow Jones Indexes. The Wall Street Journal reported in August that News Corp. was considering selling the venerable index provider, which has annual revenues of approximately $130 million to $170 million. Schwab ETFs Debut With Competitive Pricing That soniclike boom you heard at the beginning of November? That was the sound made by Charles Schwab’s entry into the ETF market. It was probably the most anticipated debut of 2009, right from the moment that Schwab’s first filings with the Securities and Exchange Commission were announced. Moreover, the fact that a heavy hitter like Schwab had deemed the ETF arena worthy of its efforts was, for many, a sign that the burgeoning industry had hit its stride. Although it has more in registration, Schwab launched just four funds: the Schwab U.S. Broad Market ETF (NYSE Arca: SCHB), Schwab U.S. Large-Cap ETF (NYSE Arca: SCHX), Schwab U.S. Small- Cap ETF (NYSE Arca: SCHA) and Schwab International Equity ETF (NYSE Arca: SCHF). The domestic funds track indexes from Dow Jones, while SCHF is tied to the FTSE Developed ex-US Index. In the days leading up to the launch, it became clear that the financial services giant was playing for keeps when Schwab unveiled the pricing on the pending ETFs. SCHB and SCHX charge 8 basis points, while SCHA and SCHF charge 15 basis points. Those fees match or beat the costs on all the competing ETFs, even the ones from Vanguard. But Schwab dropped what might have been an even bigger bombshell when it announced the day before the initial rollout that investors with Schwab accounts would not face any commission fees when they traded the Schwab ETFs. The moves are not only calculated to draw assets from established ETFs but also to draw new investors to the products who might not otherwise consider ETFs. Dollarcost averaging, for example, would be more cost-effective with the Schwab funds for account holders. GDP-Weighted Bond Indexes Provide Alternative Barclays Global Investors has launched a new family of gross-domestic-product-weighted bond indexes, as investors look for better ways to benchmark the global fixed-income universe. BGI isn’t the first to launch GDPweighted bond indexes. Pimco debuted its own index in January 2009, and others are looking at this space for a number of reasons. For starters, market-cap-weighted bond indexes assign larger and larger weights to countries that borrow more and more money. This is counterintuitive, as increased debt may raise the likelihood of default. In addition, market-cap-weighted bond indexes typically underweight emerging markets, which have less developed bond markets. Barclays notes that 22 emerging market countries account for just 15 percent of global GDP, but form less than 0.7 percent of the Barclays Global Aggregate Bond Index by market value. Barclays’ new GDP-weighted index family includes the following flagship products: • Global Aggregate GDP Weighted Index • Global Treasury GDP Weighted Index • Global Treasury Universal Index In each variation, the methodology leads to a significant underweight in Japan and a correspondingly higher allocation to countries like the BRICs, Mexico, Taiwan and other emerging markets. INDEXING DEVELOPMENTS FTSE Launches Currency Family In September, FTSE launched a new family of currency indexes, the FTSE Currency Forward Rate Bias (FRB) Index Series. The first indexes in the series to debut were jointly developed by FTSE and currency overlay firm Record Currency Management. The FTSE Currency FRB5 indexes cover the 10 currency pairs that can be formed from the U.S. dollar, euro, Japanese yen, pound sterling and Swiss franc. Each index seeks to represent the performance of the carry trade (or forward-rate bias 56 January/February 2010
strategy), tracking the performance of the higher-interest currency against the lower-interest currency in the pair via one-month-forward contracts. The indexes are denominated in all five currencies covered by the FTSE FRB family. They are rebalanced monthly. Deutsche Boerse Launches Global Sector Indexes ETFExpress reported that Deutsche Boerse launched four global sector indexes. The indexes are extremely narrow, each featuring just the largest 10 components in their respective sectors. The new additions include the DAXglobal Coal, DAXglobal Gold Miners, DAXglobal Shipping and DAXglobal Steel indexes. The gold miners and steel indexes both require that components derive at least 50 percent of their revenues from their target industries. Component weights are capped at 15 percent. for the DJ-UBS Commodity Index (DJ-UBSCI), effective January 2010. The top five component commodities are fairly similar to what they were in 2009, but with different weightings: crude oil, 14.34 percent; natural gas, 11.55 percent; gold, 9.12 percent; soybeans, 7.91 percent; and copper, 7.64 percent. Last year, the target weights for the index were as follows: crude oil, 13.75 percent; natural gas, 11.89 percent; gold, 7.86 percent; soybeans, 7.59 percent; and corn, 5.72 percent. The weights are set based on liquidity and production data, but also consider diversification and minimum weighting requirements. Of the top five, it’s clear that the largest changes have been in the weightings of gold and of copper, which displaced corn. Although 23 commodities contracts are eligible for inclusion in the broad commodity index (and each has their own calculated subindex), only 19 of those contracts are currently assigned weightings in the DJ-UBSCI. MSCI Completes Semiannual Review MSCI completed the semiannual review of its global equity index family in November. The biggest outcome? Increased exposure to BRIC economies. Surging growth in Brazil and China led to significant company additions from those markets. All in all, 11 Brazilian companies and seven Chinese companies were added, while only one Chinese company was purged from the indexes. Topping the list of additions were Brazil’s retailer Loja Renner and PDG Realty, as well as China-based Nine Dragons Paper. Strong overseas growth also helped a wide array of small-cap companies satisfy the market-cap requirements to Dow Jones Adds High-Yield Infrastructure Index Dow Jones Indexes’ partnership with Brookfield Asset Management has expanded, with the launch of the Dow Jones Brookfield Global Infrastructure Composite Yield Index in early November. The two companies originally fielded a complete family of global infrastructure indexes in 2008, and the newest addition is derived from the broad composite index of that family. The new high-yield index represents the top 70 percent of the components of the Dow Jones Brookfield Global Infrastructure Composite Index in terms of annual yield, with each component capped at a 10 percent weighting. In September, FTSE launched a new family of currency indexes. Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote Pull Quote DJ Announces 2010 Weights For DJ-UBS Commodity Index At the end of October, Dow Jones Indexes announced the new weights www.journalofindexes.com January/February 2010 57
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Contributors Rob Arnott Rob Arnott
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David Smith Publisher dsmith@fa-mag
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