Nasdaq unveils indices to measure ETF performance

The Nasdaq OMX Group has created five indices designed to measure the performance between stocks and ETFs.

The Nasdaq OMX Alpha indices allow market participants to track the return of a single stock or ETF against a leading ETF or another single stock of the same type, allowing investors and traders to capitalise on return opportunities.

For example, if the price of a stock declines less than a certain ETF, the Alpha indices tracking the specific relation between the two will increase.

This allows investors to track correlation and provides the opportunity for them to adjust their portfolios in line with the particular market relationship being followed.

Vanderbilt University professor of management Robert Whaley, who helped develop the indices, says: "With NASDAQ OMX Alpha Indexes, you're trading correlation - moreover, correlation between some important asset classes like bonds versus stocks, gold versus stocks or emerging market equities versus US equities.

"The recent financial crisis tells us how important that can be."

Nasdaq OMX US Transaction Services vice president Eric Noll says the debut of Nasdaq OMX Alpha indices will pave the way for the group to list proprietary options in the near future, on the Philadelphia Stock Exchange or the Nasdaq options market.

The NASDAQ OMX Alpha Indexes use a proprietary calculation to measure the performance of a single stock or ETF - the target - against another single stock or leading ETF - the benchmark.

The relative performance of the target and benchmark is calculated by comparing daily price returns plus dividends to the previous trading day.

The initial Alpha indices have a starting point of 100.00 as of 1 January, 2010.