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With the launch of its Global 1200 worldwide equity index, Standard & Poor’s has high hopes that the benchmark will be used to form the basis for exchange-traded funds, and for other index-linked financial products.
Particularly in the US, exchange-traded funds have become very popular investment instruments since the first of their kind was introduced 10 years ago. They are often used as an alternative to index-tracking investment funds. Exchange-traded funds are direct, real-time investments in an actual index, which can be bought and sold in the same way as an individual stock.
Index providers see the popularity of these products swelling still further as part of the general tilt towards index funds. In the US, about 40% of investment inflows into mutual funds now go into funds which track an index.
Supporters say exchange-traded funds mirror the index more accurately than an index fund which attempts to mimic an index, rather than actually being invested in that index.
In theory, the cost of exchange-traded funds is lower than investment in an index fund, because there is no management as such.
The largest US mutual tracker fund, the Vanguard Group’s 500 index fund, has expenses of over 18 basis points, says Elliott Shurgin, vice president of operations index services at S&P, while exchange-traded funds typically have expenses of just 16 basis points. However, because there are brokers’ fees to pay on top of this, the advantage is debatable.
Probably the main appeal of an exchange-traded fund is that, like a stock, it can be traded throughout the day, on a margin, and long or short.
Spiders, WEBs and Diamonds are the most actively traded exchange-traded funds in the US. Spiders are based on the S&P 500, Diamonds are composed of the 30 stocks in the Dow Jones Industrial Average, and there are 17 WEBs, each of which track the stockmarket index of a particular country.
One of the components of the S&P Global 1200 already has an exchange-traded fund based on it. In October, Barclays Global Investors launched new exchange-traded fund units, called iUnits, on the Canadian S&P/TSE 60. The Japanese market may be next. “There is already a fairly strong indication there will be one on the S&P/TOPIX 150,” says Shurgin.
Already, interest in the new global index and its components has been strong. “We try to draw upon the positive elements manifested in the S&P 500, of size, liquidity and sector representation – and the response has been tremendous,” he says.
But it is likely to be some time before an exchange-traded fund emerges which is based on the whole of the S&P Global 1200. In the meantime, it is more likely that funds will be based on individual countries or regions within the global index, according to Shurgin.
The number of exchange-traded funds should balloon next year and Barclays Global Investors has already filed with the SEC in the US its intention to launch 51 new exchange-traded funds, building on the WEBs it already has. Rachel Fixsen

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