Asia Dow index launch to target ETF licensees

Dow Jones Indexes has developed regional versions of the long-standing Dow Jones Industrial Average, including one for Asia, in response to investor demand.

US-based Dow Jones Indexes is hoping to make a splash in the region – and globally – with the launch of an Asian version of its most famous product, the Dow Jones Industrial Average (DJIA).

In fact, the company has not been pre-marketing the Asia Dow in order to avoid a potential leak of the news that would reduce its impact, says John Prestbo, editor and executive director of Dow Jones Indexes.

The downside of this approach is that the firm does not yet have any firm agreements for using the index – and the same is true for the European Dow, which also launched yesterday.

But Prestbo says potential clients are showing interest both in and outside the US, and the company is talking to prospective licensees around the world. He was speaking to AsianInvestor while in Hong Kong and is also visiting South Korea during his trip to the region.

He notes, for example, that there are exchange-traded funds based on the DJIA in Japan, listed in Osaka and Tokyo, and suggests there might be interest in expanding the franchise to include Asia.

“Everyone is watching the ETF market because it is growing fast in Asia right now,” Prestbo notes. “There is not yet an ETF vehicle that covers almost every niche, as seems to be the case in the US.

“But the ability of a vehicle to attract assets is only partly the function of the underlying index,” he says. “We believe the Dow Jones name is going to help attract assets, but a far greater input is the distribution strength of the vehicle underwriter, and that is a matter of choosing the right partners.”

Prestbo also sees potential usage of the Asia Dow – like the DJIA – as the underlying for mutual funds and structured products.

The aim of the Asia Dow – like the 115-year-old DJIA or the 150-stock Global Dow, launched in 2008 – is to provide a tradable index that is simple and transparent. Like the DJIA, the Asia and Europe Dow track 30 leading blue-chip companies in their respective regions and annually rebalance. Unlike the DJIA, they are equally weighted, while the DJIA is price-weighted.

“I don’t think [the Asia Dow] is an ideal benchmark," says Prestbo. "Broader indices would be more useful in that regard, and that goes for our own as well as anyone else's."

However, the DJIA, Asia Dow and Europe Dow measure the market in a way that is not duplicated by other major indices, which are all broader and more benchmark-orientated, he says. “They are aimed at investors who want to know the names of the companies in the index,” adds Prestbo, “to know they are comfortable holding them for a long time.”

And the fact that there is a nascent trend for large institutional investors to look at benchmarks that do not follow the traditional market-cap weighting approach suggests that different weighting approaches may gain increasing traction.

Putting together the Asia Dow raised different issues from that of the Europe Dow, such as ensuring diversification of stocks.

“One thing that was interesting about the Asia Dow was trying to find the proper balance between industry and country representation,” says Prestbo. “Because Japan dominates the equity scene in so many industries in Asia, if we went with all the leading companies in the region, we’d overweight Japan.” Even after reweighting to allow for this, Japan accounts for almost 25% of the index.

This is not such an issue in Europe, says Prestbo, where the big companies in many industries are more evenly distributed among different countries.

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