European Monetary Union may be the name, but one new game on the Continent's financial markets looks more like war than a unity march. The battle is over which of the European stock market indexes will become the new standard by which equity market performance is measured. The global titans of the business, from Dow Jones & Co. to Standard & Poor's Corp., a unit of The McGraw Hill Companies, which publishes BUSINESS WEEK, to London's Financial Times and Morgan Stanley Capital International are the contenders.
What's drawing them all into the fray is the prospect of earning fat fees for the use of their indexes for products such as index mutual funds and futures and options contracts sold by stock markets and banks. Typical fees run up to $100,000 per year for large users. The opportunities for new index products are rising fast with the launch of the euro, which is revolutionizing the way investors think about markets.
HIGH STAKES. European investors once largely confined their investments to their home countries, but now they can venture across borders without fear of foreign exchange losses. So they need the quick way of assessing performance around Europe that indexes provide. For example, they can measure how shares of Germany's Deutsche Bank and Holland's ABN Amro move not only against each other but also against European banks as a whole. Besides, integrated euro markets are attracting more U.S. institutional investors, who have long been index junkies. Already, index mutual funds, fast favorites in the U.S., are starting to appear in Europe.
The stakes are huge. Already, trading in derivatives based on Dow Jones's Euro Stoxx 50 index, the early leader, is growing fast. Dow Jones has allied itself with the German, French, and Swiss stock markets, where contracts based on its index are traded. The open interest in the contracts, a measure of market liquidity, is an impressive $4.5 billion already. Likewise, the FT went into partnership with the London Stock Exchange for its Eurotop 100 and related products under a FTSE International banner.
The Dow's fast start in Europe is in sharp contrast to what happened in the U.S. For decades, it refused to license its 30-stock Dow Jones industrial average, allowing the Standard & Poor's 500-stock index to take a big piece of the market. In Europe, S&P started off slowly. But it is now negotiating with big institutions to trade contracts based on its broadly-based Euro Plus index. "Clearly we're not the first in Europe" concedes Elliot Shurgin, vice-president of operations at S&P Index Services, "but we have taken a disciplined approach."
S&P plans a major counterattack by the end of June by launching an exchange traded fund similar to S&P Depositary Receipts, based on the S&P 500 index, that are heavily traded on the American Stock Exchange. The SPDR-based products will be based on the Euro Plus or the narrower Euro Index and could become a major market factor if they attract as much investor interest as the U.S. SPDRs themselves. S&P also plans a Global 1200 index, that melds the S&P 500 with 700 world stocks.
Other rivals aren't sitting still. On Jan 27, MSCI whose Euro index has been the dominant benchmark in Europe, launched two new indexes that will be the basis for futures trading on the London International Financial Futures & Options Exchange beginning in May. Just five days earlier, FTSE International announced three new European indexes with derivative products. "There is going to be a tough battle ahead," says Suzanne Jackson, MSCI's director of global marketing.
Staying the course is important, because there may be several winners. Different market players need different indexes. Some investors want a narrow-gauge index with fewer stocks tracking specific market segments or industries. Others prefer a broad index that's a better meter of performance of larger mutual funds.
Meanwhile, the market could make a quantum leap, shortly. European investors are likely to soon discover the joys and higher returns of investing in no-load index mutual funds. Such funds have fast become the rage among American investors. The index outfit that gets the lion's share of that market will be a real money spinner. So the battle of the euro indexes has only begun.