New S&P; Idea: Stock Indexing on Global Scale

The people behind the S&P; 500 index now are betting that some investors are hungry for a global blue-chip stock index--and investment fund.

Standard & Poor’s Corp. on Monday unveiled a new global stock index that will be the basis for a fund that will trade like a stock on the New York Stock Exchange and also in Japan and Germany.

The S&P; Global 100 index, a “basket” of stocks of 100 of the world’s largest multinational firms, is expected to be available next fall as an exchange-traded fund (ETF), similar to SPDRs (Standard & Poor’s Depositary Receipts), WEBs (World Equity Benchmark shares) and Dow Diamonds.

Not surprisingly given the tenor of equity markets worldwide, technology and telecommunications stocks will account for nearly 40% of the market capitalization of the new S&P; index, and U.S. firms will dominate.

Barclay’s Global Investors in San Francisco will manage the index fund, which is expected to be marketed both to institutional and individual investors.

Although 42 of the companies in the index are European and 39 American, U.S. firms take up 16 of the top 20 spots in the market-cap-weighted index. Only one of the firms is Latin American, Mexico’s Telmex.

The top five stocks: General Electric, Microsoft, Exxon Mobil, Intel and Lucent Technologies.

For the NYSE, the initiative represents a return to a game it had abandoned in the 1990s: so-called derivative securities.

Dozens of exchange-traded funds and similar basket securities have begun trading over the last two years as an alternative to conventional index-based mutual funds. Virtually all have listed on the American Stock Exchange, sister of the NYSE’s archrival, the Nasdaq Stock Market.

Georges Ugeux, NYSE executive vice president for international business, called the move “a first step” back into nontraditional securities. The Big Board sold its futures and options businesses in recent years.

ETFs are technically derivatives, in that they derive their value from underlying securities.

ETFs differ from index mutual funds in that, like stocks, ETFs are priced and can be bought and sold continuously on the exchanges where they trade, instead of just once a day at the close.

Moreover, unlike mutual funds, ETFs can be bought on margin, or with borrowed money. They also can be sold short--that is, investors who expect the index price to fall can sell borrowed shares in hopes of replacing them later at a lower price and pocketing the difference.

Analysts said the continuous pricing and marginability of the new ETF should make it more popular than index mutual funds among investors who want to trade rapidly and time the market--and who want a global scope.

A spokesman for Vanguard Group, the U.S. leader in index funds, said his firm would welcome the new product if it would lure away “transaction-oriented” investors. Vanguard tries to cultivate a strictly buy-and-hold clientele. Rapid-fire trading adds to expenses, and low expenses are one of the biggest selling points of index funds.

Barclay’s hasn’t disclosed any information about the kind of management expenses it expects the new ETF to have, except that “it will be very competitive,” a spokesman said.

But before S&P; Global 100 products can be introduced, they must pass regulatory scrutiny in the home countries of all three exchanges where they will be traded.

A possible sticking point for the Securities and Exchange Commission may be that some of the index’s component companies--Switzerland’s Nestle and Germany’s Volkswagen, for example--have declined listing on U.S. exchanges to avoid the complications of SEC oversight, according to Georgetown University finance professor James J. Angel.

But if it flies, the new S&P; index fund could be “a nice single stock for an investor who wants exposure to the world market,” Angel said.

Like index mutual funds, ETFs can be very tax-efficient--that is, the investor largely controls realization of capital gains or losses. By contrast, many diversified stock funds, in their trading, generate hefty taxable gains each year that must be distributed to shareholders.