Cyrillic Partners

The Nasdaq exchange has launched an index that tracks Internet-related companies, including everything from destination sites and eCommerce platforms, to hosting services and website customization services. TechCrunch has the story, but still no word on whether the Index will be price-weighted or market-weighted.

The difference is important. The Dow Jones Industrial Average, for example, is a price-weighted average portfolio, where the degree of holding represented in the portfolio is proportional to each company’s share price. The Dow-style portfolio has four times as much invested in stock XYZ than ABC just because XYZ’s share price is four times that of ABC and XYZ dominates the average. For an Internet index, that spells Google (see why V ditched the stock).

A market-value-weighted index, such as the S&P500, weighs each company in the portfolio based on its market capitalization–which makes a heck of a lot more sense given the propensity of companies to do stock splits. Google would still be an 800-pound gorilla in this system, but not quite as badly as under a price-weighted.

[Picture from PascalRossini.com]

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