NWS News Corporation

By Ari I. Weinberg 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (March 4, 2019).

The investing world is awash in indexes.

Originally built to benchmark stock, bond, commodity, real estate and currency performance, indexes now form the basis of funds and other investment products and strategies with more than $13 trillion in assets under management globally, according to Pensions & Investments, a provider of news and research to institutional money managers.

While investors in recent years have enthusiastically embraced passive investments designed to track indexes, actively managed mutual funds run by human stock pickers have had to fight to justify themselves. So how much do you know about the companies and methodologies behind securities indexes? Here is a quiz to test your knowledge.

1. According to the World Federation of Exchanges, there are 48,000 listed companies globally. How many equity indexes have been built to track these stocks?

A. 100,430

B. 3.07 million

C. 48.03 million

D. 25,127

ANSWER: B. According to a June 2018 survey of the world's largest index administrators conducted by the Index Industry Association, there are 3.73 million indexes globally, of which 3.07 million track stocks.

2. This might seem like asking who is buried in Grant's tomb, but here goes: How many securities are tracked by the S&P 500 index?

A. 500

B. 502

C. 505

D. 495

ANSWER: C. Ahh, not so obvious after all. The S&P 500 -- an index of the largest U.S. publicly traded companies by float-adjusted market capitalization (meaning closely held shares are excluded) -- does include 500 companies, as its name implies. But those companies are represented by 505 securities due to multiple share classes of Google parent Alphabet, Discovery, News Corp. (the publisher of The Wall Street Journal), 21st Century Fox and Under Armour.

3. With nearly $3.7 trillion in assets under management in the U.S., exchange-traded products have become a primary way for investors to gain exposure to index-tracking. How many index firms have exchange-traded products based on their work?

A. 15

B. 75

C. 159

D. 224

ANSWER: C. According to research firm XTF, there are 159 separate index providers whose indexes are licensed by asset managers offering exchange-traded products.

4. Which index firm was funded initially by an investment bank and an asset manager to build global benchmarks?

A. S&P Dow Jones Indices

B. FTSE Russell

C. MSCI

D. The Center for Research in Security Prices

ANSWER: C. Originally backed by Morgan Stanley and Capital Group International, MSCI Inc. builds and maintains stock indexes that cover the world. The company went public in 2009, and is no longer controlled by its founding entities.

5. In addition to mutual funds and ETFs, there are futures and options contracts that allow investors to place wagers on index moves. When was the first S&P 500 index future introduced in the U.S.?

A. October 1987

B. October 1929

C. March 2000

D. April 1982

ANSWER: D. The Chicago Mercantile Exchange introduced the first S&P 500 index future for trading on April 21, 1982. S&P 500 index options were first traded on the Cboe Options Exchange on July 1, 1983. The first retail S&P 500 index fund launched in 1976, and the first ETF in 1993.

6. This is used by index firms to validate the efficacy of a new index and how well a new index represents the market, factor or trend that it is designed to represent.

A. Regression analysis

B. Backtest

C. Heteroskedasticity

D. Stochastic

ANSWER: B. Before releasing or updating an index, an index firm will conduct a backtest of the methodology using historical data to see how the index would have worked in the past.

7. Which of the following isn't something that index firms or index committees regularly consider when evaluating index methodologies?

A. Rebalancing

B. Reconstitution

C. Tracking error

D. Weighting schema

ANSWER: C. Tracking error -- the difference between the performance of an investment and its index -- is a concern for asset managers and investors, not index publishers.

8. The S&P GSCI Total Return Index tracks how many commodities?

A. 10

B. 15

C. 24

D. 30

ANSWER: C. Introduced in 1991, the S&P GSCI tracks listed futures contracts on 24 commodities, including wheat, coffee, cattle, heating oil, lead and, of course, gold.

9. U.S. Treasury securities account for what portion of the Bloomberg Barclays U.S. Aggregate index, which was built by Lehman Brothers in 1986 to gauge U.S. bond-market performance?

A. 38.9%

B. 6.1%

C. 24.5%

D. 30.5%

ANSWER: A. The AGG, as the index is known, included 261 U.S. Treasury securities as of January. Government agency securities accounted for 6.1% of the index, corporate issues 24.5% and asset-backed securitizations 30.5%.

10. First published in 1896, the Dow Jones Industrial Average is a price-weighted index of 30 significant U.S.-based companies across many industries. How many companies have been included in the Dow across its tenure?

A. 138

B. 75

C. 202

D. 118

ANSWER: D. Of the current 30 companies, Exxon Mobil has had the longest run in the index, since 1928, while Walgreens Boots Alliance was added in June 2018 to replace General Electric, an original index component in 1896 and then a member continuously from 1907. (Two Wall Street Journal representatives sit on the five-person Dow Jones Averages index committee.)

11. Which of the following U.S. groups or entities isn't directly involved in creating or monitoring securities indexes?

A. Securities and Exchange Commission

B. Calculation agent

C. Index publisher

D. Index licensee

ANSWER: A. In the U.S., securities indexes aren't regulated directly. The SEC does, however, have an open inquiry regarding the duties and expectations of an index publisher. The calculation agent, on the other hand, plays a critical role, tabulating daily index values based on the methodology.

Mr. Weinberg is a writer in Connecticut. He can be reached at reports@wsj.com.

(END) Dow Jones Newswires

March 04, 2019 02:47 ET (07:47 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.