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More Net indexes debut
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February 18, 1999: 4:11 p.m. ET
Dow Jones adds three new benchmarks to help Internet investors
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NEW YORK (CNNfn) - Dow Jones & Co. is jumping into the already-crowded Internet index business with three new benchmarks to help investors navigate the volatile and unpredictable sector.
The Dow Jones Composite Internet Index (DJII) will track 40 companies that represent 80 percent of the industry, including heavyweights like Amazon.com (AMZN) and rising stars like online variety store Cyberian Outpost (COOL).
Within the DJII, the Internet Commerce Index will focus on companies that provide goods and services on the Web, such as eBay (EBAY) and Lycos (LCOS).
Another component of DJII, the Internet Service Index, will track businesses that provide "enabling" services and access to the Web, including America Online (AOL) and Inktomi (INKT).
Dow Jones announced the indexes on Wednesday but has tracked the companies since June 1997 to generate values. The DJII index hit its base value of 100 on June 30, 1998.
On Thursday, the composite index stood at 163.21, while the commerce index was at 194.82 and the services index was at 156.15.
(Click here for a list of companies that comprise the new Dow Jones indexes).
Options on the commerce index will trade on the Chicago Board Options Exchange (CBOE) starting Feb. 26.
Dow Jones started publishing daily values for all three benchmarks on Thursday.
Dow Jones also has plans to eventually license out the indexes to at least one financial- services company which can start new mutual funds based on the DJII and its sub-indexes.
"The Internet is very hot, and we think we've got good methodology that can help measure the market," said Michael Petronella, managing director at Dow Jones Indexes. "For the individual investor, we've designed a good index that will give them an accurate measurement of what's going on in this market."
But Dow Jones Indexes will hardly be alone online.
There are already roughly a dozen other benchmarks that follow Internet companies, including Goldman Sacks' GSTI Internet Index, CBOE's Internet Index, Inter@ctive Week's @Net Index, and TheStreet.com's Internet Sector Index and E-Commerce Index, which all have options that trade on exchanges in Chicago or Philadelphia.
There's also the Internet Stock Index (Isdex), SG Cowen's Internet Index, Hambrecht & Quist's Internet Index, and the Wired Internet Index, among others.
"A lot of them have some overlap," said Chad Rakvin, manager for quantitative analysis at Dow Jones Indexes. "Generally, you'll see the bigger companies in all of them. Beyond that, it's basically stock picking. There's no rhyme or reason. That's why we launched ours."
Mark Cavallone, Internet analyst at Standard & Poor's, said he doesn't think there are too many Internet indexes, given investors' insatiable appetite for Web-related stocks.
"Everyone is after these Internet stocks, and indexes are the best way to play the sector," Cavallone said. "I'm not surprised to see Dow Jones come out with a product like this, based on the great interest in these stocks."
Rakvin said the difference with the Dow Jones' indexes is the "methodology." For example, companies must generate at least 50 percent of their sales from the Internet; have a three-month market value of at least $100 million; and a three-month average closing price of at least $10 a share.
The companies must also undergo a rigorous "liquidity" litmus test, although Internet stocks are generally so heavily traded that it is not such a big problem, he said.
Once Dow Jones narrowed down the field of possible companies, it weighted them based 50 percent on the number of shares and 50 percent on the size of the businesses. It then ranked them, allowing each company no more than a 10 percent presence on the index. For that reason, America Online will not be overly represented in the DJII index, Rakvin said.
"We were trying to avoid having the 'AOL Index,' " he said.
According to data compiled by Rakvin, the DJII had a total return of 168.38 percent, compared with 146.36 percent for the @Net Index in 1998.
Dow Jones commerce index earned 283 percent in 1998, compared with 213.47 percent for the GSTI Index and 206.86 percent for the CBOE Index.
The Dow services index gained 142.78 percent in that year, he said.
More comparisons on the performance of the Internet indexes weren't immediately available Thursday.
While Cavallone hasn't tracked the Internet indexes closely, he said he has noticed that many include indirect Internet plays like Cisco Systems (CSCO) and Dell Computer Corp. (DELL). By contrast, the Dow Jones indexes are pure Internet companies, he said.
Of course, trading options on an Internet index will require investors to be pretty tolerant of risk, Cavallone said. Internet stocks are obviously risky, and an index that reflects their fortunes can be equally volatile.
"Playing options on an Internet index will take nerves of steel," Cavallone said. "You're going to see some enormous swings in the value of those options. You could make a ton of money or lose a ton of money." 
-- by staff writer Martine Costello
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