Dow Jones launches ten new sub-sector indexes to act as basis for ETFs

Barclays Global Investors (BGI) has licensed the indexes to serve as the basis for exchange-traded funds (ETFs) expected to be available later in May.

The new indexes are the Dow Jones US Select Oil Exploration & Production Index, Dow Jones US Select Oil Equipment & Services Index, Dow Jones US Select Health Care Providers Index, Dow Jones US Select Medical Equipment Index, Dow Jones US Select Pharmaceuticals Index, Dow Jones US Select Insurance Index, Dow Jones US Select Investment Services Index, Dow Jones US Select Home Builders Index, Dow Jones US Select Aerospace and Defense Index and Dow Jones US Select Regional Banks Index.

These specialty indexes are designed to track select groups of liquid stocks that represent granular levels of sector classification, as defined by the Industry Classification System (ICB), a classification system jointly owned by Dow Jones Indexes and FTSE Group. This enhanced investability makes the indexes particularly suited to serve as underlying for financial products.  

‘These new indexes indicate a rising demand for more specialized financial tools that tailor to the needs of market participants, and are the latest successes in our growing customized index business. We expect to see further developments in this area,’ says Michael A Petronella, president of Dow Jones Indexes/Ventures. ‘BGI is certainly one of the leading providers of such innovative, index-linked offerings.’

Nine of the 10 specialty indexes are classified according to three of the four ICB levels. Regional Banks is not part of the existing ICB structure but rather a customized group.
 
‘Our goal is to offer investors the broadest and highest quality exchange-traded products in the market,’ says Lee Kranefusss, CEO of BGI’s Intermediary and ETF Business. ‘iShares Funds appeal to many types of investors who use them in a wide variety of strategies. Many of our tactical users, both retail and institutional, have expressed considerable interest in more precise sector exposure.’

To be included in the indexes, a company must have a minimum float-adjusted market capitalization of USD 500 million on the last business day of the month prior to the indexes’ quarterly review. The float-adjusted market capitalisation of current components must be above USD 250 million to remain in the indexes.
The exceptions to the market capitalisation screening rule are the Dow Jones U.S Select Home Builders Index and the Dow Jones US Select Regional Banks Index.

These new indexes have proven to outperform the overall US stock market in the long run. Over a 10-year period, the Dow Jones US Select Home Builders Index posted a return of 558.06% while the Dow Jones Wilshire 5000 returned 103.42%

There is no fixed number of components for the new indexes. At launch the largest index is the Dow Jones US Select Regional Banks, which contains 87 stocks; and the smallest index is the Dow Jones US Select Home Construction Index, with 22 components.

A weighting scheme is applied to nine of the 10 new indexes, with the exception of the Dow Jones US Select Regional Banks Index. No component can represent more than 25% of the index, and the sum of the weights of components that weigh more than 5% cannot exceed 45% of the index.