Over the past several months, intensifying these more recent weeks, the nation has been glued to the reports covering the global financial crisis. Our company has received several requests for major index widgets. So to follow-up on the “Economy at a Glance” post, I thought it would be appropriate to go over the various options for display of the major market indices.
The first index that pops into most people’s head is the Dow Jones Industrial Average (DJ). This has been the primary index reported in the media for close to 100 years. The paradox is that since the US changed from an industrial country to a technology and service based country, the DJ has been replaced by more representative benchmarks.
Further, many of our clients have been taken back by the licensing fees that DJ requests for display of their data. This post is an attempt to offer a few alternatives to fee-based Dow Jones. The following provides several options to reporting the DJ and some history behind each index. I will cover the DJ last in this list.
Standard and Poor’s 500 more commonly known as the S&P
Let’s start with a direct quote from the Standard and Poor’s website. “Widely regarded as the best single gauge of the U.S. equities market, this world-renowned index includes 500 leading companies in leading industries of the U.S. economy.”
The index is market capitalization weighted and covers about 75% of the US equity market. With 500 companies represented the index is a more comprehensive representation of the market. The Dow is only 30 major companies and uses a proprietary formula for weighting.
So what does Wall Street think of the S&P’s value? The website goes on to say, “With more than US$ 1.53 trillion in indexed assets, the S&P U.S. indices have earned a reputation for being not only leading market indicators, but also investable portfolios designed for cost efficient replication or the creation of index-linked products.”
FinancialContent feels these are strong arguments to use the S&P 500 over the DJ. The Economy at a Glance widget will use this index as a default. We fee this is your best option when seeking an alternative.
The Russell 3000
Almost nobody in the business world or who has an investment portfolio has not escaped the term “diversify”. Professionals say the more you diversify the less risk you take. So maybe that is why the Russell 3000 is the most widely use index for benchmarking. Russell is quoted, “Over the past 25 years, Russell's innovative methodology has helped their indexes become the benchmarks most used by institutional investors. Currently, institutional investment professionals responsible for over $4.4 trillion in assets use Russell indexes to guide their portfolios.”
Where the S&P covers 75% of the market the Russell 3000 represents approximately 98% of the U.S. market. In their own words, “The Russell 3000 Index is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.”
Compared to the S&P, Wall Street benchmarks three times the amount of money using the Russell 3000. This index should be given strong consideration.
The DJX from CBOE
Here is one option that is very much out-of-the-box. In the options market there is a need for smaller units in pricing. The CBOE has created a ticker that represents a 1/100th fraction of the DJ. On a percentage basis this ticker tracks identical to the DJ. Currently there is no means for reconstructing the full price based on this ticker but a derivative product could be possible. In the mean time consider showing a percentage move on the DJ using the DJX.
In addition to the many options presented as alternatives to display of the Dow Jones Industrial Index, there are several specialized sector based indices to consider. Nearly every region of the US is home to one or more sectors driving their local economy. In the San Francisco area it is Technology and Finance, in Los Angeles it’s Media, in Boston it is Biotechnology.
Dow Jones, Russell, and Standard and Poor’s all have sector focused indexes that you can use to showcase your local markets effect on the national economy. Consider the impact of showing a comparison chart with the broad-based Russell 300 against the Dow Jones sector for your region (Dow Jones does not require a fee for sector indexes). Click on the hyperlinked names in this paragraph for direct access.
Dow Jones Industrial Index
For over 100 years the Dow Jones Industrial Index has been the most reported on index in the world. The index has also been used to benchmark a few financial instruments. In today’s market the tradition continues but not without some controversy. Only in recent years has Dow Jones asserted their rights to collect a license fee. What was once free and a great asset to the media and institutions now has value. We all now have to decide if that value is in our budgets.
FinancialContent was one of the first partners to license the Dow Jones indices and we fully support their right to protect their intellectual property. The following is an excerpt directly from the Dow Jones website; “Dow Jones sells a data service which includes the real-time and delayed values …… most notably, the Dow Jones Industrial Average (also known as, the "Dow", "Dow 30", "DJIA" and the "Industrials")…..
Dow Jones, as the sole and exclusive owner of all rights, including, without limitation, trademark, copyright, database and other proprietary rights, in and to its indexes, requires a license and payment of applicable fees with respect to display and redistribution of its real-time and delayed index values…….
Any unauthorized display, re-distribution or other commercial use of the real-time and delayed indexes constitutes misappropriation of Dow Jones’ proprietary rights in and to its stock indexes and infringement of the related trademarks.
Many of us are aware of the global impact Dow component companies like General Electric and Microsoft have but now a company like eBay or Salesforce can have immense impact on the economy too. We can all agree to respect Dow Jones property rights and the historical importance of the Dow 30. However the world is changing and if you feel the need to find new means of representing the US economy, please consider the suggestions above.