A Guide to Equity Index Construction (2nd Edition)
First published:
ISBN: 9781782724483
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How to handle industries
How to handle industries
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
“It is possible to identify all societies, in their economic dimensions, as lying within one of five categories: the traditional society, the preconditions for take-off, the take-off, the drive to maturity, and the age of high mass-consumption.”
—W. W. Rostow (see Rostow, 1990)
This book has touched on industry asset allocation on numerous occasions, but its importance in the index-construction process merits a chapter of its own. This is because one of the most difficult “policy” decisions the index constructor faces is what weight to assign to the industrial sectors. First, it is necessary, however, to define “industry” and then “sector”.
Definition 9.1. Industry An “industry” refers to a distinct category or sector of economic activity that involves the production of goods, services or commodities within a particular field. Industries are characterised by a set of businesses, organisations or companies that engage in similar types of economic activities, often sharing common production methods, technologies and market dynamics.
The breakdown of indices into sectors provides an intuitive classification for groups of companies. It also facilitates diversification. The
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