PRINCETON, N.J. -- Most investors yawned when Dow Jones Indexes launched what it hopes will be a one-stop-shop for passive money managers and their clients -- the U.S. Total Market index.
Inertia and more narrow coverage of the U.S. stock market than either the Wilshire 5000 or the Russell 3000 likely will prevent the new index from being adopted by a wide swathe of investors.
"There's an issue of inertia. People tend to hang onto their indexes. Even if this new index has real advantages over the Russell 3000, it may still have a slow adoption rate," said Andrew Rasmussen, director of manager research at Asset Strategy Consulting, Los Angeles.
Almost everything
Rather than maintaining a fixed number of stocks in the index, the Dow Jones U.S. Total Market index, which is market cap-weighted, will represent 95% of the investible U.S. market.
The 5% of the U.S. market index doesn't cover comprises very small or illiquid stocks. The U.S. Total Market index includes all large-cap and midcap stocks in the United States and 50% of the small-cap market, and is updated quarterly, rather than annually as most indexes are.
But many institutional investors want to invest in those very small stocks, said Richard Ennis, chairman of Ennis Knupp + Associates, Chicago.
"I don't see any point in one more index that is less comprehensive than the Wilshire 5000. I always advocate the broadest index for institutional clients.
"Even the Russell 3000 only covers 97% of the investible market, and it still leaves out thousands of small stocks. With some rebound evident already in 2000 for small-cap stocks, I wouldn't recommend an index that leaves out even more small-cap stocks," Mr. Ennis said.
Mr. Rasmussen said the Russell 3000 is the new index's main competitor.
He said one clear advantage of the new is its quarterly rebalancing -- "the more frequent, the better.'
The total market coverage of the new Dow Jones index probably won't appeal to defined contribution plans, which tend to offer separate large-cap, midcap and small-cap options.
Judy Bednar, director of structured equity at Northern Trust Quantitative Advisors, Chicago -- which uses its own internal broad index -- is concerned about the Dow Jones Total U.S. Market index's more narrow coverage.
At the end of January, she said, the Dow Jones Total U.S. Market index included only between 92% and 93% of the Wilshire 5000. And at the end of December, it covered about 90% of the Wilshire 5000.
Waiting awhile
The Dow Jones index also waits six months after an initial public offering before including the stock in the index; the Wilshire 5000 includes new IPOs when the index is reformulated every year.
Unless a client requests a portfolio managed using the Dow Jones Total U.S. Market index, Northern Trust won't jump to offer it, Ms. Bednar said.
Still, one institutional investor jumped on the bandwagon with a specialized use of the broad index. Barclays Global Investors, San Francisco, has exclusive rights to design exchange-traded mutual funds using the U.S. Total Market index and its 10 market sectors, 40 industry groups and 70 subgroups. BGI has offered 17 ETFs since 1996, now totaling about $2 billion in assets.
