Dear Dagen: Is There a Global Titans Index?

Do you know whether there is an index fund by the name of Dow Jones Global Titans?

-- Anita Yagod

Anita,

No one has come up with an index for companies that start with the letter R. But somebody's probably working on it.

As index investing grows in popularity, almost every possible combination of stocks seems to be fair game: e-commerce, the new economy, the Islamic market.

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Despite this index's overblown but titillating name, the Dow Jones Global Titans index does have some merit.

This index, launched in July of this year, consists of 50 of the world's largest multinational companies.

These companies are the biggest stocks around the globe and are among the most liquid. The more liquid a stock, the easier it is to trade (which results in lower transaction costs). This index actually makes it easy to create a corresponding investment product.

Sure enough, this index has been around for less than six months and there are already two products that track it, with a third on the way.

John Nuveen & Co. offers a unit investment trust that tracks the index as does Nike Securities.

Both of these five-year UITs are sold only through brokers and carry sales charges of 4.5%, with a portion paid up front and the rest paid over the duration of the trusts.

Fortunately, there's a cheaper alternative on the way. In several weeks, E*Trade (EGRP Quote) will launch a no-load fund that tracks the Global Titans index.

Most, if not all, of the companies in this index are familiar names, such as Microsoft (MSFT Quote), Chase Manhattan (CMB Quote) and British Telecommunications (BTY Quote) and Credit Suisse. (The Dow Jones Web site includes a list of all the holdings.)

To make it into this index, a company must be among the largest global blue chips and a leader in its industry with either a dominant position or a competitive advantage.

The index's construction starts with the 3,000 stocks on all the Dow Jones Global indexes. The pool is then reduced to the 100 stocks with the largest market capitalizations. They're then ranked according to five fundamental measures -- assets, book value, revenue, net profit and foreign sales -- plus weighted market value.

Companies in the index are weighted by market capitalization, which gives larger, more liquid companies a bigger position than the smaller ones.

The result: an index that's noticeably, but not surprisingly, heavy in U.S. stocks.

U.S. stocks make up almost 70% of this index, according to Lehman Brothers data from Oct. 25. The U.K. is the next largest country weighting with a tiny 8%. Switzerland, Germany and the Netherlands follow with 6.4%, 5.8% and 3.8% respectively. Japan, France and Italy bring up the rear.

Inside the Global Titans Index
Number of stocks	50
Number of U.S. stocks	29
Number of industries represented	17
Largest industry weighting	Telecommunications (16.45%)
Smallest industry weighting	Aerospace/Military Tech (0.73%)
Countries represented	U.S., U.K., Switzerland, Germany, the Netherlands, Japan, France and Italy
Largest country weighting	U.S. (69.3%)
Smallest country weighting	Italy (0.8%)
Data as of Oct. 25. Source: Lehman Brothers, BARRA, Dow Jones.

This index, like any other blue-chip index, doesn't provide exposure to a broad range of industries. It covers 17 industries, dominated by telecommunications companies at a 16.5% weighting. For comparison, the S&P 500, the primary U.S. benchmark, covers 59, according to its new classification system. (The technology component of the Global Titans Index grows even larger starting today, as Lucent Technologies (LU Quote) joins the index, replacing Mobil, which has merged with Exxon.)

"In addition, the exposure is not diversified across many firms," according to a Lehman Brothers research report authored by William Velasco and Alex Budny. Six of the 17 industries in this index are represented by only one company. "This narrow coverage exposes the investor to firm-specific risk in many industries," they conclude.

Hey, it's not all bad.

Despite the fact that this index holds only 50 stocks, it covers more than 21% of the world's market capitalization, representing almost $5.6 trillion.

When Lehman compared this index to broader global benchmarks such as the MSCI World Index and the FT/S&P World Index, the firm found that the Global Titans index is highly correlated with the others. Also, the index is slightly more volatile.

The Global Titans index is one of a few -- the 100-stock FTSE Global 100 Multinational is another -- that aims to track global blue-chip stocks, companies that have economic exposure beyond their home countries.

A world index such as the 1,373-stock MSCI World Index, on the other hand, will have much greater breadth and will capture much more of the world's total equity capitalization. With a world index, or even a pure international index, you get exposure to much smaller markets.

This Global Titans index may be worth further inspection. However, if your portfolio is already heavy in U.S. stocks, you may want to look at an entirely separate asset class: pure international stocks. An investment in Dow Jones' Global Titans might duplicate many of your existing holdings.

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