Broad International and Global Market Indexes

Broad international and global market ETFs are the topic of discussion in the first part of this chapter. These ETFs follow indexes that cover the entire globe as well as the international component, regional components, and individual country components.

Broad markets also include slicing the international market horizontally into developed market and emerging market indexes. Horizontal slicing also includes global industry indexes that form the basis for global industry ETFs to be discussed in this chapter.

There are many index providers that track the global and international markets. Each provider has its own methodology. The common thread among index providers is that each one builds its broad indexes from the country level up. That means countries are lumped together into regions, regions are lumped together to form international indexes, and international indexes are combined with U.S. indexes to form global indexes. A second methodology lumps developed markets with emerging markets to form international and global indexes.

Style and size indexes are carved from each level of a global index hierarchy to form style indexes. Figure 11.1 is a simplified illustration of the process, whereby countries form regions, regions form developed and emerging markets, and so on.

The providers ofglobal market indexes have created an extensive series of benchmarks, and no two index providers carve up the global markets in the exact same fashion. Tens of thousands of market indicators represent the returns of more than 150 countries,

Countries (Japan, Germany, Brazil, etc.)

Global (All-country indexes including United States) International or Foreign Markets_

Developed & Emerging Markets

Regions (Pacific, Europe, South & Central America)

Figure 11.1 Basic Global Index Structure multiple regions, and various slices of the developed and emerging markets. Those indexes also cover multiple securities types from stocks to bonds to commodities.

It is not possible to completely examine the global marketplace in just one chapter. My intent is to provide a brief overview. The best place to learn the extensive details of global index construction is to visit the web site of each index provider. The main providers of global market indexes include Morgan Stanley Capital Investments (MSCI), Standard & Poor's (S&P), DowJones (DJ), and FTSE. Their web sites are in the ETF Resource List in Appendix B. Reading a prospectus provided by an ETF that is a benchmark to an index that interests you also provides more detailed information.

MSCI Standard indexes target 85 percent of the free-float adjusted market cap segment of the global equity markets. The size cutoff varies somewhat across countries and regions depending on the extent of the market. To cover most of the other 15 percent, MSCI Small Cap indexes are promoted by the firm as ''exhaustively covering'' the investable small cap market worldwide. The data include both developed and emerging markets. In total, MSCI has created more than 20,000 style, sector, and regional indexes worldwide. That leaves no shortage of indexes to use as future benchmarks for ETFs.

The S&P Global 1200 Index combines the features of a broad global portfolio with a liquidity screen to make their indexes ideally suited for ETFs benchmarked to larger companies. The S&P Global 1200 is a free-float weighted index covering approximately 70 percent of the global market capitalization. It comprises the S&P 500 for the United States, and five non-U.S. indexes: S&P Europe 350, S&P/TOPIX 150 (Japan), S&P/TSX 60 (Canada), S&P Asia Pacific 100, and S&P Latin America 40.

The S&P Global 100 Index consists of 100 leading companies listed in the S&P Global 1200 whose businesses are global in nature and that derive a substantial portion of their operating income from multiple countries. S&P selects individual companies for the index based on strong fundamentals, industry leadership, market liquidity, and size. The Global 100 does not represent the largest 100 companies globally, although it is close.

The FTSE All-World Index Series was launched in 1987. It provides a single set of ground rules that are applied to FTSE Global Equity Index Series (Large, Mid, and Small Cap), the FTSE All-World Index Series (Large and Mid Cap), and the FTSE Global Small Cap Indexes.

Dow Jones Indexes and Wilshire Associates Incorporated have developed the DJ Wilshire Global Index family. They provide benchmarks that map a broad global market universe covering 59 countries and 98 percent of global market capitalization.

0 0

Post a comment