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Big Global Indexes Coming

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NEW YORK (–Russell Investment Group plans to launch in the fourth quarter of this year a set of wide-ranging indexes to cover world stock markets. The initial versions will represent small-, large- and all-cap stocks, with separate country, industry and style indexes to follow.

Kelly Haughton, founder and strategic director for Russell Indexes, said global benchmarks are needed to evaluate money manager performance and Russell is responding to institutional clients’ needs. The global indexes will follow the same methodology as Russell U.S. indexes such as the small-cap Russell 2000, which is tracked by an iShares exchange traded fund.

The new indexes are expected to encompass 98% of the investable global market. That means the gauges will be of wider scope than the MSCI EAFE, which covers developed markets outside of North America. MSCI EAFE is the basis of the second-largest ETF in the United States by asset size after the S&P 500 SPDR, according to a recent report from State Street.

While Russell is emphasizing the benchmark function of the new measures, the indexes are likely to become the basis of investment vehicles. Ernie Ankrim, Russell’s chief investment strategist, said he would not be surprised if there is enough liquidity to invest in parts of the index, even if it may not be possible to have an ETF with full global coverage.

Investing in the worldwide index would require the near-impossible feat of buying and selling many thousands of stocks in dozens of markets, some of them thinly traded. It has not been easy to make markets for MSCI EAFE; for instance, while there’s long been interest to develop futures products, putting that idea into practice took decades.

The Chicago Mercantile Exchange introduced a MSCI EAFE e-mini futures contract this March. It’s a complex product involving 1100 stocks across more than 20 countries and currencies, said Tina Lemieux, a managing director at the CME.

Volume is increasing every day and some managers are still unwinding country positions in their portfolios in preparation to shift to the index, she said, speaking several weeks after the launch of the contract. Most markets start slow and grow over time.

The more instruments exist for an index, the more useful it becomes in particular for hedge funds. A futures contract is typically a less costly way to get exposure to an index than an ETF; the latter in turn has the advantage that it can be short sold and used to hedge the futures contract. However, making markets for the new Russell indexes will be more difficult because of their scope.

Mr. Haughton of Russell pointed out that equity markets are becoming more global and probably more liquid, with stocks increasingly trading around the clock like currencies. That makes global indexes more useful, he suggested.

Tacoma, Wash.-headquartered Russell, a subsidiary of Northwestern Mutual, manages more than $167 billion in assets and advises clients on more than $2.4 trillion.

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Contact Bob Keane with questions or comments at [email protected].


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