Jim Wiandt

Fortune to Create Exchange-Traded Funds

The latest in a procession of exchange-traded funds (ETFs) to enter the market comes from Fortune, which has licensed State Street Global Advisors (SsgA) to manage new ETFs based on the Fortune 500 and Fortune e-50 stock indexes.

Vivek Shah, who heads up Fortune's new Business Venture Unit, stated in an interview, "It's been 46 years in the making. But it's finally here." Shah also noted that the Fortune 500 had in fact presaged the S&P 500 by two years. Fortune launched its Fortune 500 and e-50 indexes in December of 1999.

State Street, which will be managing the funds, has enjoyed great success with its SPDRs, which are based on various S&P indexes (including the 500 - ticker symbol: SPY). While it is clearly too early to determine a release date, and expense ratios have not been set, Shah said he expects the two funds to go on the market "this year," and that expense ratios will likely be "competitive" (SPY currently trades with an expense ratio of 0.18%).

The Fortune 500 Index is based on Fortune's signature list of America's 500 biggest companies, ranked by revenues. The Fortune e-50 Index tracks the performance of companies shaping the Internet economy, and includes firms that generate a significant share of their revenues from online products or services, as well as those that provide and maintain the Internet infrastructure.

The new funds, which will be called the "Fortune 500 Index Tracking Stock" and the "Fortune e-50 Index Tracking Stock" respectively, are expected to begin trading on the American Stock Exchange sometime this fall. SsgA filed a registration for both stocks July 18.

"This groundbreaking agreement will give investors the opportunity to invest in financial products that track our indexes," said Jack Haire, president of The Fortune Group.

ETFs have been gaining popularity, and are now often responsible for approximately 50% of the daily trade volume on the American Stock Exchange (AMEX). To date, 58 ETFs are listed on the AMEX, with combined assets of over $46 billion.

Similar to index mutual funds, ETFs allow investors to buy or sell a portfolio of securities through a single share. But ETFs differ from mutual funds in that, like stocks, ETF shares are listed on an exchange and can be bought and sold at intra-day prices. The funds are managed by professionals and provide the investor with diversification, cost and tax efficiency, liquidity, marginality, are useful for hedging, have the ability to go long and short, and some even provide quarterly dividends.

"By creating these indexes, Fortune has identified two attractive segments of the U.S. economy," said Timothy B. Harbert, president of SSgA. "SSgA has joined forces with Fortune to provide investment opportunities that allow people to invest easily in these sectors."

Fortune's Vivek Shah also spoke at length about the e-50 index, which he said is in search of benchmark status as a gauge of the Internet economy. (Evidence the Fortune is pushing the index can be found in the fact that the e-50 index is located above the Fortune 500 on its Web site.) Unlike the Fortune 500, which is based solely on the largest U.S. companies based on revenue, the selection process for the e-50 is a subjective one.

The e-50 includes not only pure Internet plays, but also other companies that derive significant revenue from the Internet. Unlike most Internet indexes, however, the e-50 determines representation in the index by the percentage of revenue those companies (like AT&T and Microsoft) derive from the internet relative to their total revenue and market capitalization. Shah said that despite the subjective selection process, Fortune aims to keep turnover in the index low.