- 2000: Volume 9, No. 2 The ISDEX®:Internet Futures & Options

Much has been said in recent months about the Internet as a stock investment sector. Whether they are wildly outperforming other areas of the market or experiencing a downturn that is uniquely their own, "'net stocks" are in the news, and are an important force driving today's economy.

Volatility in the sector can be amazingly high, and changes come quickly as leaders merge and emerge at a rapid pace. Keeping close track of all the changes can be a full-time job, and picking the winners can be an equally daunting task.

Measuring performance presents yet another challenge, with valuations often appearing to have little correlation to traditional barometers such as p/e ratios.

A number of indexes have emerged to measure performance of the Internet sector as a whole, starting with the debut of the ISDEX^® in 1996. Now for the first time, futures and futures options contracts are available on the ISDEX, giving investors a unique trading tool for the Internet sector that offers a one-stop Internet investment and a market performance measurement.

The ISDEX, created by internet.com Corporation, is an index of 50 top Internet stocks, comprising the leaders in all industry sectors including e-commerce, content, software, security, enablers, infrastructure and access. The index is limited strictly to the Internet, requiring that in order for a company to be listed, more than half of its revenue must come directly from the Internet itself. This makes the ISDEX not just another technology index, but more narrowly and more specifically an Internet index. In a broader sense, though, the ISDEX strives to represent the diversity of the Internet industry, rather than only one subsector such as e-commerce.

Stocks in the ISDEX are reviewed quarterly and also are updated immediately as changes such as mergers occur, keeping the index on top of industry developments.

The ISDEX is modified capitalization-weighted. It is capitalization weighted, but with the restriction that no single stock's capitalization can comprise more than 10 percent of total index capitalization. If a stock's capitalization exceeds that amount, it is ratcheted back to the limit of 10 percent. In this way, the ISDEX utilizes the benefits of capitalization weighting, but prevents any single issue from dominating the index.

internet.com, using its own and third party data, determined in February 1999 that 89 stocks currently met the company's 51 percent revenue criteria to be classified as "Internet stocks." The market capitalization of those 89 stocks on February 12, 1999 was billion. The market capitalization of the 50 stocks in ISDEX was billion on February 12, 1999. Therefore, ISDEX represented 95 percent of the capitalization of the Internet stock universe on that day. While the industry has continued to grow rapidly, the ISDEX continues to represent industry leaders and much of the Internet stock universe.

ISDEX futures and futures options made their debut on the Kansas City Board of Trade in June of 1999.

The multiplier for KCBT ISDEX futures is $20, meaning that a move of a full index point on the index is worth $20. At the time of this writing the ISDEX was trading around 890.00 index points, making the worth of one contract around $17,800. This is a relatively small contract size compared with some other stock index products, and at this writing the ISDEX had a relatively low minimum exchange margin as well, coming in at $1,250.

Volatility in the ISDEX, as with volatility in the Internet sector it measures, has been high recently. (See chart.) This provides for numerous trading opportunities in the index, both intraday and longer-term. For investors with significant exposure to the Internet in their stock portfolios, ISDEX futures and options provide a hedging tool.

Figure 1

Another way to consider trading the ISDEX is as a spread trade against other broader indexes, measuring how the Internet sector is performing in relation to the rest of the stock market and capturing changes in that relationship.

Real-time cash and futures quotes on the ISDEX are being distributed free of charge by the KCBT, and news about Internet stocks is easily available to the public. Additionally, internet.com Corporation, creator of the ISDEX, provides a free daily newsletter via e-mail on the Internet stock market.

For investors involved in the Internet sector, ISDEX provides a way to measure the market, and ISDEX futures and options provide an investment tool as well as an alternative or complement to investing in individual issues or mutual funds.

Candice Bowman is vice president of marketing for the Kansas City Board of Trade. For more information on KCBT ISDEX futures and options, contact Candice at 800-821-5228 or check out the KCBT's website at www.kcbt.com. ISDEX is a registered trademark of internet.com Corporation.