Once Upon A Time...financial indices were delightfully simple constructions, designed to help measure movement in financial markets. There was the venerable S&P 500, the Dow, and a few assorted and sundry others. These indices tended to be cap-weighted and tracked large segments of the market.
Today, thanks in large part to the proliferation of exchange traded funds, you can find an index that tracks just about anything--constructed in myriad and sometimes questionable ways. In fact, many are created for the sole purpose of generating an ETF that can then track the newfangled index. The tail seems to be wagging the dog.
With that in mind, I've posted below a list of 14 indices. Seven of them are real, with real exchange traded funds that track them (or will be tracking them soon), and seven of them--well, I just created them for the fun of it. They are pure fantasy. Can you tell the seven real indices from the seven fantasy indices? (Answers on page 72.)
1. The GI/Gender Health Index invests in healthcare, life sciences and/or biotechnology companies that have been identified as gastrointestinal/genitourinary/gender health companies. Companies included in the GI/Gender Health Index are engaged in the research, clinical development and/or commercialization of therapeutic agents.
2. The MSCI Oil Derivatives Index gauges the performance of companies manufacturing, processing, delivering or storing petroleum byproducts and other derivatives of oil production. The Index includes equities in selected companies that meet the profile, but may also include options and other derivatives of the derivatives, so to speak.
3. The Credit Suisse Group Global-Warming Index tracks a variety of stocks that analysts believe will benefit from the global push toward lower emissions.
4.The Pacific ex-Japan Dividend Index measures the performance of dividend-paying companies incorporated in the Pacific region, excluding Japan. The Index comprises companies incorporated in Hong Kong, Singapore, Australia or New Zealand that meet other requirements necessary for inclusion. Companies are weighted in the Index based on annual cash dividends paid.
5.The UltraShort MidCap400 Index corresponds to twice (200 percent) the inverse (opposite) of the daily performance of the S&P MidCap 400 Index.
6.The Russell 2000 Reverse Matrix Summer-dip Index includes a base of 100 equities with historical performance that tends to move in inverse direction to the Russell 2000 Index on an average monthly basis, excluding the typically depressed months of June, July and August.
7.The S&P Equal Weight Materials Index consists of the common stocks of industries like chemicals, construction materials, containers and packaging, metals and mining, and paper and forest products. All companies in the Index, including Air Products, Sealed Air, Bemis and Ball, are given equal weight, regardless of the size of capitalization.
8.The BARRA Bull REIT Index reflects the performance of real estate investment trusts that benefit from the growth of highway and railroad infrastructure throughout the United States and Canada.
9.The Fortune 500 Index invests in securities that are known to be held by those investors in last year's listing of America's wealthiest per Fortune magazine. The Index aims to capitalize on the collective brainpower of the nation's most affluent.
10.The Super Bowl 20 Index chooses companies whose commercials played during last year's Super Bowl and were given most acclaim by television viewers. The historical performance of the Index (retrospectively) gives solid indication that a favorable showing on America's most viewed show is a good barometer of annual sales growth.11.The CEOpay Index starts with the S&P 500 and eliminates those corporations where the ratio of CEO compensation to the compensation of the average employee exceeds 500. The rationale behind the index, formed in 2007, is that overfed CEOs both bleed a corporation of financial resources and damage employee morale.
12.Internet HOLDRS Index, is an unmanaged index of a group of specified companies that are involved in various segments of the Internet industry. Currently, the Index features 12 companies, although four of them--Yahoo, Amazon, eBay, and AOL/Time-Warner--constitute roughly 85 percent of the index.
13.The Dow Jones BRIC 50 Index is designed to provide balanced representation across four markets, targeting five stocks for Russia and 15 each for Brazil, India and China. Stocks are selected to the Index within each country based on size and liquidity, and then the selections are aggregated to form the Index.
14.The Dow Jones BRAC 50 Index is designed to provide balanced representation across three markets--all somewhat tangential to the continental European market. Targeting 20 stocks for Britain, 20 for Austria and 10 for the Czech Republic, the selections are aggregated based on size and liquidity.
Russell Wild is the author of Exchange-Traded Funds for Dummies (Wiley 2006).