John Spence

Dow Jones and FTSE Launch Global Sector Indexes

The trend toward global sector investing is picking up steam.

Dow Jones Indexes yesterday launched the Dow Jones Sector Titans Indexes, a new set of indexes comprised of global blue-chip companies. The sector indexes in the new family are listed in the table below:

Each index is comprised of 30 companies that are global leaders in the sector. According to Dow Jones, each index covers at least 50% of the total market capitalization of the underlying sector. Securities in the indexes will be selected by free-float market capitalization, or the total number of shares actually available for purchase on the open market.

Michael Petronella, Managing Director at Dow Jones Indexes, said the announcement was the first step, and that more global sector indexes are on the way.

"We've had global sector indexes for a long time, and their basic application was for use in benchmarking," said Petronella. "In the future, we'll aggregate certain sectors to make it easier for investors to invest in one index - an example of this is a TMT [technology, media, telecommunications] index. In other cases we'll disaggregate - for instance we take the the healthcare sector and pull out the pharmaceuticals piece."

The securities in the sector indexes are culled from the Dow Jones World Index, which includes companies from 34 countries.

Internationally, index providers are scrambling to launch global sector indexes as the focus shifts away from country-specific investing. Barclays Global Investors (BGI) has a slew of exchange-traded funds (ETFs) based on MSCI country-specific indexes that were launched when investing in a foreign country's broad economy was all the rage. Trends aside, one truth remains for the index providers that are sensitive to the needs of fund managers who are sensitive to the desires of investors - If you build it, they will most certainly come.

Sector investing has definitely taken off on the domestic front - according to Financial Research Corporation, sales of sector funds increased to $62 billion in 2000, an increase of over 104% from the prior year. Sector funds accounted for more than 35% of total long-term net sales. Whether or not it's a good thing to give investors a relatively easy way to jump into the latest hot sector I'll leave to you to decide.

Why global sector investing?

There are many reasons. One is that we are seeing the emergence of a true global economy with the deregulation of international trade. More multinational companies are being spawned as a result of mergers and acquisitions that are extending through country borders.

"A lot of the research is indicating that correlation in the sectors is what really matters, and countries are not playing as large a part," says Petronella. "What a company is does is more important than where it is domiciled."

The European Monetary Union (EMU) and the introduction of the euro have caused a higher correlation between the economies of European countries, reducing the allure of country-specific investing in Europe.

Also, many exchanges are working on cross-listing stocks and funds in different time zones - an example being the recent partnership between AMEX and the Euronext Exchange to cross-list ETFs.

The FTSE take

UK-based index provider FTSE also went live with a series of global sector indexes yesterday. The new family includes 11 sector indexes:

Source: FTSE

Like the new Dow Jones indexes, the FTSE global sector indexes will be free-float adjusted.

"The continuing shift toward sector-based investment is driving the demand for tradable global sector indices," said Mark Makepeace, FTSE Chief Executive.

The FTSE global sector indices were developed in consultation with Merrill Lynch. Details of the FTSE methodology for its new global sector indexes are available at the the FTSE website.