Index Spotlight: Dow Jones Style Index ETFs
By John Spence, Associate Editor

Currently there are exchange-traded funds available that track style indexes from Russell, Standard & Poor's/Barra, and Dow Jones. At first glance these indexes seem similar, but as we've seen before subtle differences in index methodology can lead to significant differences in performance. With this point in mind, let's zero in on State Street Global Advisors' streetTRACKS funds hitched to the Dow Jones style indexes:

• streetTRACKS Dow Jones U.S. Large-cap Growth (ELG)
• streetTRACKS Dow Jones US Large-cap Value (ELV)
• streetTRACKS Dow Jones US Small-cap Growth (DSG)
• streetTRACKS Dow Jones US Small-cap Value (DSV)

State Street doesn't offer Dow Jones mid-cap style funds, but let's see how the large- and small-cap offerings differ from their Russell and S&P/Barra competitors. Each index provider uses its own unique set of rules to define growth and value.

Measuring style

Dow Jones uses six factors when sorting companies by style: projected price-to-earnings (p/e), projected earnings growth, trailing p/e, trailing earnings growth, price-to-book (p/b), and dividend yield. Check out our glossary for descriptions of these terms. Notice Dow Jones uses two forward-looking measures and four historical factors.

S&P/Barra uses one measure to classify a stock's style: p/b. Russell uses p/b as well as a projected measure: IBES forecasted earnings.

Here nor there

Index providers utilize various measures to determine style, but the differences don't end there. How those criteria are used to break up the equity universe is also important.

S&/Barra uses a quick and dirty approach. All stocks are ranked by p/b and the top half are considered growth and the bottom half are value.

Russell and Dow Jones have a third category called "blend" or "neutral." In a nutshell, Russell takes the approach that some stocks are middle of the road in terms of style and thus can be in both the growth and value indexes. Russell uses a complex non-linear weighting - more on this here.

Dow Jones does something different with its "neutral" category - these stocks are considered neither growth nor value and are therefore not included in the growth or value indexes.

Rebalancing and turnover

Russell rebalances its indexes once a year, which tends to reduce total turnover but can lead to stale categorizations as the year wears on. S&P/Barra conducts semiannual rebalancings of its style indexes to get back to the even 50/50 percent style split by market capitalization.

Dow Jones also rebalances semiannually, but takes unique steps to decrease turnover. For example, within the style indexes are "weak" and "strong" stocks for growth and value. Dow Jones uses buffer rules so that stocks don't jump around between indexes due to brief but intense market changes.

The fundamentals

Now that we've glossed over the basic differences in methodology, let's take look at the nuts and bolts of the streetTRACKS Dow Jones style ETFs and their competitors.

Further reading

Remember, the "best" index is the one that fits snugly in an individual investor's portfolio with an eye on the whole picture. Therefore, it's important to know how indexes work before investing, and we've only just scratched the surface here. Visit the index providers' sites for more information on their style indexes:

• Russell Style Indexes
• S&P/Barra Style Indexes
• Dow Jones Style Indexes

06/11/2002