Indexes special report


Click here to download the PDF

Indexes on Deck, or Benchmarks on the Bench?

With the Dow Jones Industrial Average hitting record highs so soon after the recent financial crisis, some investors are questioning whether indexes are a true reflection of the health of financial markets. At the same time, investment firms managing assets that are bound to track these benchmark indexes are questioning the costs levied by providers, while exchanges and index providers dispute who owns the right to list contracts based on an index.

Who would have thought that these financial tools-which essentially group representative baskets of companies together and create an aggregate value to reflect the investment strength or weakness of a particular sector, industry or region-would still have a role in today's markets, at a time when "consumerization" of finance is seeing investors cut out traditional advisors in favor of investing directly.

Yet index use is arguably stronger than ever-in part because those independence-seeking investors are migrating to funds or instruments like exchange-traded funds that are linked to indexes, and in part simply because of the economic recovery and a growing population requiring savings plans and pensions that deliver exposure to growth with limited risk. Also, notes Gareth Parker of Russell Indexes, what else would investors use to benchmark the performance and behavior of their portfolios?

But some consumers feel trapped using indexes that rely on the strength of their brand rather than the value of their index selection methodology, and which are sometimes accompanies by expensive and complex licensing models. "Vendor licensing models have not kept up with the changes in [consumers'] global operating model," says John Simons, director of market data services at John Hancock, adding that index providers continue to raise fees at levels exceeding the rise of another key index-the consumer price index.

In response, index providers are developing new products that deliver a broader and more sophisticated set of exposures, including dynamic, "alpha-tracking" indexes, new weighting and constituent selection models, such as by fundamental factors including geographic revenue split, or preference factors such as ESG. And more competition from providers such as CRSP-which last year won a big deal with Vanguard-and startup the Freedom Index Company, among other niche specialists, will make it arguably easier to switch benchmarks, and drive further innovation if established vendors are to retain and win business.

Click here to download the PDF

Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.

To access these options, along with all other subscription benefits, please contact or view our subscription options here:

You are currently unable to copy this content. Please contact to find out more.

You need to sign in to use this feature. If you don’t have a WatersTechnology account, please register for a trial.

Sign in
You are currently on corporate access.

To use this feature you will need an individual account. If you have one already please sign in.

Sign in.

Alternatively you can request an individual account here