A Guide to Equity Index Construction (2nd Edition)
First published:
ISBN: 9781782724483
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Making the index investable
Making the index investable
Preface
Acknowledgements
Introduction
Which benchmark?
Modern portfolio theory and the benchmark index
Sampling and selection
Construction method
Making the index investable
Collection and processing of data
Servicing and maintenance
How to handle industries
How to handle countries and currencies
Factor indices and smart beta
Innovative indices
The commercial indices
Indexation and exchange-traded funds
Bespoke “custom-made” indices
Tying it all together
Appendix: The GICS methodology
Bibliography
Disclaimer
INTRODUCTION
“Today, almost every index is called investable, although little thought is given as to what that actually requires or how to achieve it. At the same time, investability is increasingly important to the way indices are used for investments and investment products. Liquidity and low tracking errors don’t just happen, after all: they must be part of the index design.”
—David Blitzer, Managing Director and Chairman of the Index Committee, Standard & Poor’s
It was explained in Chapter 4 that creating an index is a sampling exercise but the sample has to be useful. It has to be investable. In this respect, there are really two distinct purposes of indices. An index can be used either as a benchmark for investments or as the foundation of an investment vehicle.
The latter purpose is where investability is important for investors attempting to replicate the index. In the practical world, investability directly influences an investor’s ability to achieve the returns of an index. There is little point constructing an index that cannot be used, and, as a result, this chapter will show how to achieve investability.
Definition 6.1. Investability Investability refers to the degree to
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