Chicago, IL – August 25, 2009 – Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: News Corp. (NWS), McGraw-Hill (MHP), NYSE Euronext (NYX), Thomson Reuters (TRIN) and Novartis (NVS).

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Here are highlights from Monday’s Analyst Blog:

Dow Jones to Change Hands

Dow Jones & Co., owned by News Corp. (NWS), has started seeking potential buyers for its stock market index business, including the renowned benchmark Dow Jones Industrial Average.

Goldman Sachs has been appointed to explore strategic options for the business. News Corp. bought Dow Jones & Co. in 2007 for $5.7 billion, and has never released any financials for the unit since its acquisition. As an independent company, Dow Jones last reported results for the first nine months of 2007, when its revenue increased 18% year over year to $101.3 million.

Market analysts believe that competitors, like McGraw-Hill’s (MHP) Standard & Poor’s, FTSE, a joint venture between the Financial Times and the London Stock Exchange, MSCI Barra, Russell Indexes, NYSE Euronext (NYX), Bloomberg and Thomson Reuters (TRIN), will be interested in Dow’s index business.

Xolair Label Expanded in EU

This morning, Novartis (NVS) announced that it has received approval from the European Commission (EC) for the use of Xolair (omalizumab) as an add-on therapy for severe persistent allergic asthma in children in the age group of 6 to 11 years.

The approval is positive news for the company and should expand the patient base for the drug. Asthma is a chronic lung disease which is estimated to affect about 10% of children in Europe. It is also the most common cause of school absenteeism and children often use oral corticosteroids to deal with the disease. However, despite conventional therapy, severe asthma remains uncontrolled in more than 50% of children with this condition.

Xolair is a humanized monoclonal antibody aimed at treating the underlying mechanism of allergic asthma. The product works by blocking the action of immunoglobulin E (IgE). This helps in preventing the onset of debilitating symptoms, such as shortness of breath and wheezing, in severely affected patients.

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Goldman Sachs has been appointed to explore strategic options for the business. News Corp. bought Dow Jones & Co. in 2007 for $5.7 billion, and has never released any financials for the unit since its acquisition. As an independent company, Dow Jones last reported results for the first nine months of 2007, when its revenue increased 18% year over year to $101.3 million.

Market analysts believe that competitors, like McGraw-Hill’s (MHP) Standard & Poor’s, FTSE, a joint venture between the Financial Times and the London Stock Exchange, MSCI Barra, Russell Indexes, NYSE Euronext (NYX), Bloomberg and Thomson Reuters (TRIN), will be interested in Dow’s index business.

The company’s stock market index business consists of 130,000 equity indices and earns revenue by licensing them for use as benchmarks for investment in hedge fund, real estate and commodity markets. Its best known index is the Dow Jones Industrial Average, which was introduced in 1884 by Charles Dow and Edward Jones comprising 11 stocks. Currently, the basket comprises 30 stocks.

Right now, in the wake of MSCI’s reclassification of Israel as a developed market, I’m working on a rundown of the country classifications of four major index providers: MSCI, Dow Jones, FTSE and Standard & Poor’s.

The evolution of emerging markets (and sometimes devolution of developed markets—see Greece, which could lose developed-market status in the FTSE indexes) is just particularly fascinating to me. Take some of the frontier/emerging markets that the index providers cover at the very bottom rungs of the investability ladder: Latvia? Slovakia? Trinidad & Tobago? Mauritius?

Frankly, I’m dying to know what the investment stories are behind these tiny, tiny markets. And while I believe frontier markets (like, say, Vietnam) offer some awesome investment opportunities, is anyone really itching to sink some funds into an obscure eastern European country that probably has a smaller population than the number of visitors to my local mall on the day after Christmas?

I realize there are different rules and methodologies that each of the index providers use, but it all seems rather mysterious. For example, Dow Jones—which generally uses the International Monetary Fund’s designations—classifies Slovenia as a developed market, while MSCI has it labeled as a frontier market. That’s quite a disparity.

Lately, the majority of the focus has been on Israel and South Korea, though, and whether they will transition to developed-market status within the various classification systems. MSCI, of course, just promoted Israel to developed status last week, while keeping Korea in the emerging category. Given that the majority of internationally invested funds are benchmarked to MSCI indexes (at least in the U.S.), this issue has been followed fairly closely by investors. At the end of March, Israel was the ninth-largest country in the MSCI Emerging Markets Index, with a 4.0% weighting, and South Korea was the fourth-largest, with a 12.4% weighting.

Given the amount of money benchmarked to that index and the even greater amount benchmarked to the MSCI EAFE Index, which Israel now joins, that’s an awful lot of funds shifting around. South Korea is up for reconsideration in 2010 (as is Taiwan, another country straddling the emerging/developed divide).

But MSCI seems to be on the tail end of the trend: Dow Jones, S&P and FTSE all classify South Korea as a developed market, while only Dow Jones and FTSE put Israel into the developed bucket. S&P still has Israel as emerging. Of course, FTSE, S&P and Dow Jones have a lot fewer funds tracking or measured against their global indexes.

They can shift their country classifications with relative ease, as they deem appropriate, without a lot of reverberation. But if MSCI decides to promote a country to developed status, many, many billions of dollars are going to be moving around, with all sorts of economic consequences.

And not all of them will be positive: In Israel, there is concern that the country moving from relatively big-dog status in the emerging markets index to a minor position in the developed markets index will actually result in outflows from the local stock market.

(Read an article on the latest MSCI moves here. Also of interest might be a Bloomberg article on the subject here, and another article from an Israeli publication about a Deutsche Bank study on the potential negative impacts of the switch.)

Teva Pharmaceutical, Israel’s largest company, saw its price spike in June shortly before the official MSCI announcement, but there’s no telling what the longer-term effects will be. It will be interesting to see what happens with that, and even more interesting to compare the outcomes with what happens when South Korea—and its big stock, Samsung Electronics—is finally promoted to developed status.

Yeah, that was definitely the unrepentant nerd talking …

Since first jumping into the exchange-traded funds market two-plus years ago with 20 dividend-weighted exchange-traded funds, WisdomTree Investments has firmly been cast as a value-styled management shop.

That focus on weighting index-based ETF portfolios on business fundamentals -- rather than traditional  market-cap size figures -- hasn't changed. But the New York-based firm launched Thursday an ETF focused squarely on large-cap growth stocks.  

But two items stand to separate the WisdomTree LargeCap Growth ETF (NYSEArca: ROI) from the pack.

For one, the new fund focuses on corporate earnings, otherwise known as net income or profit, to weight stocks in its portfolio. That's different from rivals such as the $9.2 billion iShares Russell 1000 Growth Index (NYSEArca: IWF) and the $4.6 billion iShares S&P 500 Growth Index (NYSEArca: IVW). Both use straight market capitalization sizes to determine portfolio weights.

"The only pure competitors for ROI on the large growth side are traditional market-cap-sized indexes," said Luciano Siracusano, WisdomTree's chief investment strategist.

The lowest-priced large-cap growth ETF on the market is the Vanguard Growth ETF (NYSEArca: VUG). It has an expense ratio of 0.10% and tracks the MSCI U.S. Prime Market Growth Index. WisdomTree's ROI is expected to be 0.38% per year.

That leads to the second big point of departure for the new ETF. As an early advocate of using fundamental data rather than market-cap size metrics to weight portfolios, WisdomTree is a pioneering nontraditional ETF provider. Besides dividend streams, its portfolios are branching into another key measure to value businesses -- net earnings.

Assessing The Field

WisdomTree isn't alone in offering nontraditional index-based ETFs. PowerShares has a series of funds based on the FTSE RAFI indexes created by Research Affiliates and FTSE. Those use a broad set of fundamental valuations to design portfolios. The closest in terms of style to ROI is probably the PowerShares FTSE RAFI US 1000 Portfolio (NYSEArca: PRF). But that's categorized as a large-cap value fund by Morningstar.

Another nontraditional ETF provider using different fundamental valuations is RevenueShares. Its closest rival to ROI would be the RevenueShares Large Cap ETF (NYSE: RWL).  It takes the blue-chip universe and weights those names by annual sales. And again, Morningstar categorizes RWL as a large value fund.

The closest competitor is probably SPA ETF's MarketGrader Large Cap ETF (NYSEArca: SZG), which uses a quantitative strategy to select 100 large-cap stocks. It is classified as a large-cap growth fund by Morningstar, although it is not explicitly screened to capture growth stocks alone.

ROI is the only non-traditional ETF with an explicit growth focus.

ROI's index starts with around 300 stocks based on four growth factors: earnings-per-share growth; sales-per-share growth; book-value-per-share growth and stock-price-per-share growth.

By contrast, the Russell 1000 Growth Index uses a combination of price-to-book values and projected earnings estimates. Other benchmarks throw in a few other factors to create a different valuation mix.

"All of the pure growth indexes use multiple factors to select components," said Siracusano. "But they determine weightings in the same way -- by market capitalization sizes."

Even though the benchmark underlying WisdomTree's new fund uses a different methodology to rank stocks, ROI's list of constituents looks much the same as its market cap weighted rivals. For example, some 17 of the top 20 companies listed in the WisdomTree LargeCap Growth Index are also in the Russell 1000 Growth Index as well as the S&P 500 Growth Index.

"But since we weight our index by [net] earnings, the characteristics are different from the other growth indexes," said Siracusano.

Backtested data from WisdomTree shows its index has a lower price-earnings ratio. Here's how it shaped up heading into November:

In the past 10 years through Sept. 30, WisdomTree says its large growth index outperformed the Russell 1000 Growth index by an average of about four percentage points per year. It lists the following average annualized returns for that period:

• 4.76% for the WisdomTree LargeCap Growth Index
• 3.06% for the S&P 500 Index
• 0.59% for the Russell 1000 Growth Index

"We created it to provide investors with an ability to own growth companies, but in a portfolio that has a lower PE ratio than other cap-weighted growth funds," said Jeremy Schwartz, WisdomTree's research director.

Looking Underneath The Hood

The WisdomTree LargeCap Growth benchmark is rebalanced once a year. After its last reconstitution, on March 31, several significant differences showed up compared with growth indexes that stuck to market-cap weighting methodologies.

One was that Apple (Nasdaq: AAPL) was given a larger weighting than Occidental Petroleum (NYSE: OXY). In a traditionally weighted index, the computer maker could expect to receive more than twice the weighting than the oil producer since its market cap was about $127 billion and Occidental's was around $60 billion at the time.

But in the WisdomTree index, more weight was actually given to Occidental since it had greater net profits -- $5 billion compared to Apple's $4 billion.

Another example is Google (Nasdaq: GOOG). It wasn't as high in the WisdomTree index as in the other major growth indexes. Perhaps most notably, ROI had Berkshire Hathaway among its Top 10, whereas none of the other indexes did.

In terms of sectors, Schwartz says that the WisdomTree index has the highest weighting to Technology, just like the S&P and the Russell index. The Vanguard benchmark, the MSCI US Prime Market Growth Index, has 394 holdings and a similar sector breakdown as the Russell 1000 Growth Index and S&P 500 Growth Index.

"We're cutting out the PE multiples from our weightings system," said Schwartz. "We're looking at the bottom line for corporate profits to weight our index."

In other ways, the indexes are similar, even given their distinct methodologies. In terms of holdings, the WisdomTree index has 300 growth stocks, similar to the S&P 500 Growth, which has 315 holdings. The Russell 1000 Growth stands apart in terms of holdings, with 600 stocks. With the lowest number of holdings among the three, the WisdomTree index is the most large-cap-oriented.

ROI's expense ratio is expected to wind up slightly less than PowerShares' lineup of RAFI-based index funds. It  recently lowered costs on the domestic fundamentally weighted ETFs to 0.39%. (See story here.) Meanwhile, the RevenueShares large-cap ETF charges 0.49% a year.