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A Blue chip index for derivatives trading Back  
The makeup of the Dow Jones Stoxx Indexes
In anticipation of the EMU and the launch of the euro on January 1, 1999, the Dow Jones STOXXSM indexes were launched on February 26, 1998. By the end of June 1999, over 125 licensees in 14 European countries, Canada and the United States had together issued over 650 exchange-traded and OTC products with a notional value of over 24 BEUR. The operating company - STOXX Limited based in Zurich - is a partnership between Deutsche Boerse AG, Dow Jones & Company, ParisBourseSBF SA and Swiss Exchange SWX.

The Dow Jones STOXXSM indexes are REAL European indexes, i.e. Rigorous, Easily tradable, Appropriate and Liquid, and are fully integrated with the Dow Jones Global Indexes. The 564-member index family consists of 5 broad, 3 blue chip, 18 economic sector, 57 market sector and 58 industry group indexes each calculated on a price and return basis in both euros and in US dollars.

The 5 broad indexes are:
* Pan-European Dow Jones STOXXSM index (16 countries; 590 stocks).
* Eurozone Dow Jones EURO STOXXSM index (10 countries; 296 stocks).
* Dow Jones STOXX ex UKSM index (15 countries; 442 stocks).
* Dow Jones STOXX ex EuroSM index (6 countries; 294 stocks).
* Dow Jones STOXX NordicSM index (4 countries; 113 stocks).

These indexes are complemented by the Dow Jones STOXX 50SM, Dow Jones EURO STOXX 50SM and Dow Jones STOXX Nordic 30SM blue chip indexes. The Dow Jones STOXX 50SM and Dow Jones EURO STOXX 50SM indexes underlie the very successful derivatives traded at the EUREX and MONEP/MATIF exchanges. In the first half of 1999, nearly 2.4 million futures contracts were traded (options: 1.0 million contracts), i.e. a daily average of approx. 20,000 contracts (options: approx. 8,000 contracts). The open interest at the end of June 1999 was approx. 250,000 futures contracts and approx. 350,000 options contracts.

Rigorously derived from the relevant broad indexes, these blue chip indexes share a logical and transparent construction methodology. They include only the largest stocks in the broad indexes (by market capitalisation) and are highly correlated (0.98 to 0.99) with low tracking error.

Given the growing harmonisation of the pan-European, Eurozone and Nordic regions, the 'one region' rule in the blue chip index methodology ensures deep market coverage. For each of these three regions, regional market sector leaders are selected with the objective of covering 60% of each regional sector's market capitalisation. As a consequence, the addition of new countries to these regional equity markets is easily accomodated.

Two rules contribute to the stability of the indexes. First, all existing blue chip components automatically qualify for the next blue chip index selection list. Second, blue chip components deleted because of a merger/take-over are replaced in the index by the successor if the successor qualifies for the relevant broad index. Consequently, the turnover of the underlying blue chip portfolios is not unduly increased by temporary fluctuations in the regional sector leaders' market capitalisation and the growing number of cross-border mergers.

These rules make the blue chip selection process easy to predict and, therefore, replicate. Although the blue chip index composition is reviewed annually, extraordinary changes that occur between reviews are implemented immediately based on the monthly blue chip selection lists prepared strictly in line with the annual review procedures. These procedures are transparent and the index components, monthly selection lists and dates of the periodic reviews are freely available on the STOXX Limited website (www.stoxx.com). The integrity of the indexes is guaranteed because STOXX Limited is a pure index provider and has no connection with the issuers of index-based products.

The website also provides free information on many other aspects of the indexes; e.g. tickers and easily downloadable historical data. Additionally, the "Guide to the Dow Jones STOXXSM Indexes" (Version 3.0, June 1999) can be downloaded from the website.

Easily tradable, these blue chip indexes have proven ideal for arbitrage, hedging and other risk management purposes. With only 50 stocks (Nordic: only 30 stocks), they are simple, easily replicable and marketable; three key success factors.

These focussed blue chip indexes have optimum stocks/liquidity profiles. E.g. 42 of the 50 stocks in the Dow Jones STOXX 50SM index are from the 5 largest pan-European markets (i.e. France, Germany, Netherlands, Switzerland and the U. Kingdom) and represent an average of 44% of the investable universes in their respective countries.

Appropriate geographical coverage of the new post-euro Europe is crucial for investors in the European equity markets. STOXX Limited anticipated this demand for geographically appropriate blue chip indexes with the launch of the pan-European, Eurozone and Nordic indexes. The logical methodology is flexible and robust enough to meet future market demand for new blue chip indexes that are transparent and, most importantly, consistent with their parent broad indexes.

Liquid blue chip indexes are important for hedgers and traders. Indeed, these easily replicable and tradable indexes have driven demand for the component stocks, which in turn has driven liquidity and performance. This liquidity is increasing, as confirmed by the reduction of the bid-ask spread for Dow Jones EURO STOXX 50SM index from approx. 0.73% in October 1998 to approx. 0.10% in mid-July 1999. Between the launch on February 26, 1998 and June 30, 1999, the Dow Jones STOXX 50SM index has outperformed the Dow Jones STOXXSM index approx. 25% to 17%. In the same period, Dow Jones EURO STOXX 50SM index has outperformed the Dow Jones EURO STOXXSM index approx. 32% to 24%.

The tangible evidence presented supports STOXX Limited's assertion that the Dow Jones STOXXSM blue chip indexes are indeed the REAL indexes for successful European derivatives. Clearly, the market is convinced that STOXX Limited is providing excellent European indexes for the future, now.

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