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News be added to MSCI’s global benchmarks. The broad-market Global Small Cap Indexes added 362 securities during this rebalancing and deleted 165. Among them, the largest additions to the World Small Cap Index were U.S.-based FTI Consulting and Aqua America, as well as U.K.-based Ladbrokes. The changes reflect the growing strength of emerging markets and recent outperformance by small-cap names. DJI Launches Islamic Index For China Investors interested in investing according to the dictates of Islam now have a benchmark that covers China. The Dow Jones Islamic Market Greater China Index tracks companies based in Hong Kong, Taiwan and mainland China, and applies Dow Jones’ methodology for screening out stocks that are not Shariah compliant. Individual component weights in the greater China index are capped at 10 percent of the index, and Taiwan’s weight specifically is capped at 30 percent of the index. At launch, the index comprised 290 components; the top five included China Mobile Ltd., China Unicom (Hong Kong) Ltd., CNOOC Ltd., Hon Hai Precision Industry Co. Ltd. and Taiwan Semiconductor Manufacturing Co. Ltd. Use of the new index as a benchmark has already been granted via license to Malaysia-based Prudential Fund Management Berhad, which originally approached Dow Jones about designing the index. S&P Rolls Out UCITS- Compliant S&P GSCI In September, Standard & Poor’s rolled out three new commodity indexes that are designed to comply with the requirements of the European Union UCITS III rules for diversification. The S&P GSCI Capped Commodity 35/20 Index covers all 24 of the commodities in the S&P GSCI, but the first component to reach 35 percent of the index is capped at that weight. All other components are capped at 20 percent, and sector weights are kept in line with the original S&P GSCI. The S&P GSCI Capped Component 35/20 Index covers only 18 of the 24 component commodities. It caps the largest one at 35 percent of the index, and the rest at 20 percent, but with no regard for sector weights. The S&P GSCI Enhanced Capped Component 35/20 Index uses a similar weighting methodology but applies it to the S&P GSCI Enhanced Index. S&P Launches Enhanced Oil Index In September, Standard & Poor’s launched the S&P GSCI Crude Oil Enhanced Index, which covers the WTI crude oil futures traded on the CME/ NYMEX. The new index is a subindex of the broad S&P GSCI Enhanced Index. Like its parent index, the oil index uses an “enhanced” roll methodology that takes “dynamic” factors into account in its roll schedule, with the intention of outperforming the standard index by minimizing the effects of contango. According to the methodology for the S&P GSCI Enhanced Index, the WTI crude oil contract “rolls from the 1st contract month to the 6th contract month if the contango between 1st and 2nd contract month is more than 0.50%.” S&P Launches VEQTOR Index November saw the launch of the S&P 500 Dynamic VEQTOR Index, a strategy index that makes daily allocations among the S&P 500, the S&P 500 Short-Term VIX Futures Index and the overnight LIBOR rate, which represents a cash component. The daily adjustments to the weightings of the three factors are determined by realized and implied volatility trend decision variables. A stop-loss provision in the index’s methodology moves the index’s entire allocation to cash should the index drop more than 2 percent during the previous five business days. The VEQTOR index is designed with the intention of providing investors with a way to hedge against downside risk in the market using volatility, an indicator known for its negative correlation to stock returns. The new index is a member of S&P’s family of indexes based on the volatility of the S&P 500. Russell Unveils Target Date Performance Index In September, Russell Investments announced the creation of its Russell Target Date Metric. Essentially a customized index to measure the performance of individual target date fund families—as opposed to individual funds within a family—it is targeted at investment professionals, such as plan sponsors and financial advisers, who need to evaluate entire fund families rather than just individual funds. Technically, the RTDM is an index that measures how well a fund family performs against any corresponding family of target date indexes, but Russell uses a benchmark of its own as a default. The RTDM also incorporates active management, asset allocations, glide path design and the assumption of cash flows, according to Russell. At the time of the announcement, Russell said it was calculating the RTDM for 43 different target date fund families, with the launch set for the fourth quarter. BNY Mellon Launches Depositary Receipt Composite In November, Bank of New York Mellon announced the rollout of the BNY Mellon Composite Depositary Receipts Index, which essentially covers the entire universe of American and global depositary receipts listed on the NYSE, NASDAQ, NYSE Amex and London Stock Exchange, and over-the-counter. The broad index has 657 component depositary receipts. It is weighted by market capitalization and is adjusted for free float using the float methodology developed by Dow Jones Indexes. As of the end of September, the largest country in the index was the United Kingdom, at 19.26 percent, followed by Japan and France at 14.09 percent and 9.87 percent, respectively. 58 January/February 2010
BarCap Debuts Emerging Asia Swap Indexes Barclays Capital introduced the Barclays Capital Emerging Markets Asia Swap Index family in October. The index family tracks nominal interest rate swaps in Asia’s emerging markets. According to Barclays, “Each index systematically tracks the return of a nominal par coupon interest rate swap of a specific tenor, rebalancing to par every month end.” The family includes core spot indexes covering periods within the one- to 10-year tenor range, as well as one-year forward indexes for each of the covered markets. Those markets include the Singapore dollar, the Hong Kong dollar, the Korean won, the Thai baht and the Taiwan dollar. S&P Debuts Maturity Year Muni Indexes October saw the launch of the first municipal bond indexes to target bonds maturing in specific years when S&P rolled out its S&P AMT-Free Municipal Bond Index Series. At launch, each index included between 430 and some 3,040 noncallable municipal bonds maturing between June 1 and Aug. 31 of a specific year. The maturity years currently covered by the eight indexes in the series range from 2012 to 2020. According to S&P, the indexes can be used in laddering strategies and in matching up investment horizons with investment objectives. Indexes in the series have already been licensed by Barclays Global Investors to underlie ETFs that are currently in registration. Markit Launches Convertible Bond Index In September, Markit rolled out its Markit iBoxx Liquid USD Convertible Bond Index, covering the U.S. convertible bond market. The components list comprises 100 bonds and preferred securities included based on their face values outstanding at inception. Cashsettled forward contracts will be available on the index, with new series initiating every six months. The launch of the CVBX was paired with that of the Markit iBoxx Liquid USD Delta-Hedging Stock Index, which takes long stock positions in the companies of each component in the CVBX that reflect the initial delta of the respective bonds or securities at inception. The index can be traded via equity swaps. AROUND THE WORLD OF ETFs Guggenheim Completes Claymore Purchase In mid-October, privately held institutional money manager Guggenheim Partners completed its acquisition of Claymore Group Inc. The deal covers all aspects of Claymore’s operations, including Claymore Securities Inc., Claymore Investments Inc. in Canada and Claymore Advisors, LLC. The deal was originally announced in July. Claymore is the 13th-largest ETF provider in the United States, with 34 ETFs that have a combined total of $2.2 billion in assets under management. SSgA Launches VRDO ETF State Street Global Advisors launched the world’s second variable rate demand obligation ETF, the SPDR S&P VRDO Municipal Bond ETF (NYSE Arca: VRD), on Sept. 24. It tracks the performance of the S&P National AMT-Free Municipal VRDO Index, which holds VRDOs issued by U.S. states, local governments and agencies. The fund charges 0.20 percent in annual expenses. VRD follows in the footsteps of the PowerShares VRDO Tax-Free Weekly Portfolio (NYSE Arca: PVI), an ETF that launched in November 2007 providing similar exposure to the VRDO market, which has accumulated nearly $1 billion in assets. VRDOs are municipal bonds that can be “put back” to their issuers at full value on a weekly basis, and tend to hold very little risk. At its launch, PVI was paying a taxfree 30-day SEC yield of 0.84 percent. BGI Rolls Out Mega-Cap Funds Barclays Global Investors added three new mega-cap ETFs to its lineup, with the debut of the iShares Russell Top 200 Index Fund (NYSE Arca: IWL), iShares Russell Top 200 Growth Index Fund (NYSE Arca: IWY) and the iShares Russell Top 200 Value Index Fund (NYSE Arca: IWX). Each charges 0.20 percent in annual expenses. The Russell Top 200 Index measures the performance of the largest 200 U.S.- listed companies. New iShares Covers Eastern Europe The parade of new emerging markets ETFs continued in early October with the launch of the iShares MSCI Emerging Markets Eastern Europe Index Fund (NYSE Arca: ESR). The fund tracks a free-float-adjusted market capitalization index measuring the equity performance of four countries: At launch, Russia dominated the lineup at 75 percent of the portfolio; followed by Poland, at 13 percent; Czech Republic at 6 percent; and Hungary, at 6 percent. Roughly half of the fund is invested in energy names, with Gazprom and Lukoil as its top two holdings (about one-third of the portfolio). ESR is the second emerging market Europe ETF to hit the market, following www.journalofindexes.com January/February 2010 59
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Documenting The Collapse Of The Cor
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Contributors Rob Arnott Rob Arnott
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FREE subscRiption oFFER! The Journa
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David Smith Publisher dsmith@fa-mag
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Editor’s Note Was 2008 A Last Gas
Page 11 and 12: Record-High Correlations Pose Chall
Page 13 and 14: Figure 4 Correlations Of Weekly Ret
Page 15 and 16: Diversification And Risk Management
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Page 19 and 20: For over 40 years, our industry has
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Page 43 and 44: Actively Passive? When a little act
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Page 49 and 50: Apparent Value Added By Fund Manage
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