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The way your index is made makes all the difference

By: Jonathan Horton, global head of change management, FTSE Russell

The world is changing quickly. From accelerating cross-border capital flows to the rise of emerging markets, the world investors must grasp and understand today is radically different from that of 20, or even 10 years ago.

For this reason, it’s critically important for investors who use indexes to understand the process that index providers use to govern the creation and ongoing management of their indexes. As the influence of passive investing has grown, index providers are increasingly at the forefront of major market changes and are expected to make objective, well-reasoned, and thoughtful judgments on index methodology to ensure that the indexes they oversee accurately reflect evolving global markets.

For example, FTSE Russell has been on the leading edge of facilitating access to the growing China A-shares equity market to help institutional investors gradually build their position as foreign investor quotas increase. FTSE Russell created a separate family of China A-share inclusion indexes to help institutional investors build a gradual position in China A-shares in anticipation of the A-share market opening more widely in the future.

FTSE Russell also takes a highly active role in defining size (i.e., small, mid, large) and market classification (i.e., Frontier, Emerging, Developed) criteria for its global equity indexes to aid investors in portfolio construction. By clearly outlining asset allocation building blocks through index exposures, we enable investors to better balance market and size exposures and avoid gaps.

These are two examples where the index provider is making adjustments to its global indexes that may impact billions, even trillions, of investment dollars. We must be reasoned in our approach and follow a consistent governance process. For FTSE Russell, this means understanding key drivers in the market, seeking input from a wide range of market participants, and implementing index policy and developing index products that address investor needs in a responsible way.

I encourage all investors to fully understand the process governing the decisions their index providers are making and the index methodologies they are designing. Are they transparent? Do they seek input from all market participants? Do they clearly communicate their decisions? Are they governed by what is right for the end investor? At FTSE Russell, we consider all these things of paramount importance in helping our clients make better investment decisions.

 

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Note: This blog was published on the Vanguard website on December 5, 2017© 2017 The Vanguard Group, Inc. 

The London Stock Exchange Group plc (LSE Group) includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional. 

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Past performance is no guarantee of future results. Charts and graphs are provided for illustrative purposes only. Index returns shown may not represent the results of the actual trading of investable assets. Certain returns shown may reflect back-tested performance. All performance presented prior to the index inception date is back-tested performance. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. However, back- tested data may reflect the application of the index methodology with the benefit of hindsight, and the historic calculations of an index may change from month to month based on revisions to the underlying economic data used in the calculation of the index. 

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