Any way you slice it, from U.S. large growth to the Philippines, 2001 was not kind to equity indexes. While the United States was busy trying to cope with a massive terrorist attack, the rest of the world joined it in an uncharacteristically uniform march toward recession. Index performance was bad in the United States, but it turns out it was even worse overseas. MSCI had the United States pegged at -16.21% for the year and the World ex-USA at a dismal -22.68%. Although it was mostly a disappointing year, there were a handful of standouts.

Who was top performer? FTSE has Morrocco coming in at a whopping +140.83%. And in second, a sweet irony flying in the face of the "index effect" concept was Sri Lanka, +50.50%, recently dropped from MSCI's emerging-markets index. Trailing the pack were Luxembourg, -49.97, and Egypt, -45.57%. To make some sweeping generalizations, the places to be in 2001 were small value (Dow, Russell & Barra U.S. small-value indexes were all among the top performers), much-maligned gold and precious metals and bonds-all generally intuitive hedges against the large-growth fallout. And where not to be? Well, large growth, pretty much anywhere in Europe and (still) technology. Utilities and mid-cap stocks suffered again after one good year.

Dreams of Morocco

I once saw a piece that said if you'd started many years ago with a dollar and put all your money on what would be the best performer of fixed income or equity for each upcoming year, you'd be spectacularly wealthy today. (This, of course, is an impossible assumption.) Well, imagine the results had you picked the best performing index each year. Yes, we've entered the land of dreams, but just for fun, here is a sample of some of the best and worst performing indexes for 2001.

The Top 10 Indexing Stories of 2001

1. MSCI Moves To Free Float. Morgan Stanley Capital International announced its move to the new gold standard of indexing: free-float weighted indexes. Essentially, free-float weighting adjusts underlying stock weights in an index by taking into account only stock that is readily available to the open market. Thus, a company that is 80% held by the company's ownership would only have 20% of its capitalization used for the purpose of the index's weighting. MSCI also changed its coverage from 60% to 85% of the capitalization of each market. MSCI announced that the move to free float would come in two phases, the second of which it plans to complete by May 31. With around $1 trillion benchmarked to MSCI indexes worldwide, the move has thus far proceeded with remarkably little market effect on money managers. With the MSCI move, now all major index providers have moved most of their indexes to free-float weighting.

2. NYSE UTPs. After railing for years against unlisted trading privileges, the NYSE joined the fun. The move, which could prove to be a seminal event in the history of ETFs, means the NYSE is trading in SPDRs, Diamonds and QQQs. The decision to move forward on UTPs was a nod to the wild success of exchange traded funds, mutual funds that trade like stocks, and are now among the highest-volume listings in the world. By getting into unlisted trading of the most popular ETFs and announcing the launch of more funds of its own, the NYSE signaled it was serious about the new business. With even tighter markets being made with the NYSE's entrance, it seemed likely that investors would continue to benefit from the increased competition.

3. Vanguard/ S&P Lawsuit. A bitter lawsuit between The Vanguard Group and Standard & Poor's ended in defeat for Vanguard. At issue was Vanguard's attempt to launch ETFs based on S&P indexes under existing licensing agreements. Vanguard's existing licensing agreement with S&P for its Vanguard 500 fund is very favorable to Vanguard, and there is speculation that S&P negotiated some form of exclusivity with one or more of the other ETF licensees. While Vanguard claimed that the ETF shares were merely a share class of existing funds, S&P claimed that they were new products not covered by the existing licensing agreement. The judge agreed, and his ruling held upon appeal. Despite the loss, Vanguard went on to launch a Wilshire 5000 Total Market ETF and (early this year) a Wilshire 4500 Extended Market ETF. The total-market fund entered the top 10 in ETF assets in just a few short months.

4. Morningstar and Bloomberg Enter Index Licensing. Adding more competition to an already crowded field, both Morningstar and Bloomberg announced that they both would launch a series of tradable indexes, attempting to leverage their brand names and ride the recent boom in indexing. Bloomberg has long nurtured an array of stock indexes. It entered the index-licensing business with the launch of four iBloomberg European sector ETFs managed by Barclays Global Investors. Fund maven Morningstar announced the launch of 16 indexes that follow its style-box methodology.

5. Index Funds 30th Anniversary/ Vanguard 500's 25th Anniversary. It was a big year for birthdays in the indexing world. The first-ever index fund, an unwieldy equal-weighted affair put out for Samsonite by Wells Fargo (now Barclays Global Investors) celebrated its 30th anniversary, while Vanguard celebrated the 25th anniversary of its first retail mutual fund and the world's largest mutual fund, the Vanguard 500.

6. Global ETF Rollout. Exchange traded funds continued to take the world by storm. More ETFs were launched in 2001 than had been launched in all previous years combined. At year-end, there were 202 ETFs trading on markets globally, with 110 of those launched in 2001. However, with the decline in markets and a large number of international ETFs struggling to gain a foothold, ETF assets failed to double for the first year since 1994. Still, total global ETF assets at year-end amounted to $104.8 billion, up from $79.3 billion at the start of 2001. Assets held steady in the United States despite the down market, while the number of international-trading funds (and their share of total assets) moved up dramatically. The biggest story for ETFs clearly appeared overseas, where the total number of funds increased from 12 to 101, and assets increased from $7.7 billion to $20.2 billion. Total market share of funds trading outside of the United States rose correspondingly from 10.5% to 19.3% of the global assets.

7. The Euro. A new currency was launched across Europe with the close of the year. New euro coins and paper money replaced all of the francs, pesetas and drachmas of the 12 member states of Europe. Although the currency already has been operational in electronic form since 1997, the distribution of the actual bills and coins marked a huge step in the transition to a more unified Europe. And none too soon-European markets were among the world's weakest during 2001, largely because of economic stagnation, but in part because of fears about the euro launch. It remained to be seen what effect the unprecedented currency would have on global markets.

8. GICs. Standard & Poor's and Morgan Stanley Capital International announced a plan to implement the Global Industry Classification Standards (GICs) jointly in an effort to make sector data more easily comparable. The new methodology allows for four levels of sector detail: 10 economic sectors, 23 industry groupings, 59 industries and 123 subindustries. The move toward uniformity by two of the largest index providers was seen as a step in the direction of helping money managers maintain uniform sector coverage across different indexes.

9. September 11 Survival and Recovery. Despite pleas for calm and promises of market stabilization, U.S. stock market indexes suffered through a harrowing plunge after the terrorist attacks. Within a month, however, many of the initial losses had been recouped. At year-end, markets stood at levels above pre-September 11 numbers. With the markets less concerned with terrorism than continuing economic softness, it remains to be seen whether the gains will hold up. Following the attacks, Dow Jones put out an interesting little piece that traced the history of the Dow Jones Industrial Average in times of crisis. The rally after the initial tumble conforms to history.

10. Index Fund Performance. Index funds surprised expectations in 2001. Many relevant indexes outperformed corresponding actively managed funds, although 83% of diversified U.S. equity funds beat the S&P 500. After being soundly beaten in 2000's falling markets, index funds managed to outperform actively managed mutual funds in most investment categories, according to Morningstar. Conventional wisdom holds that active funds are able to outperform index funds in down markets, owing to the fact that they hold more cash-turning the "cash drag" of up markets into a "cash buffer" in down markets. Actively managed funds also may be more likely to weed out losers in such conditions. No such luck this year, however, since index funds outperformed actively managed funds on many fronts.

Jim Wiandt is the author of a book recently published by John Wiley & Sons titled Exchange Traded Funds, An Insiders Guide to Buying the Market. Wiandt also is publisher of Index Funds International at