Indices play increasingly important role in the investment world

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Not all indices are created equal says Laurence Black, founder of The Index Standard, and one of the interviewees in this report.

Indices may not be equal but the variety and range of indices in the modern world is staggering, driven partly by the huge growth in investment funds that are based upon them. According to the Index Industry Association (the IIA), there are now over three million indices globally.

Indices are indicators of the health of an economy, tools for benchmarking and, increasingly, the foundations of popular exchange traded investments – indices underpin our investment world.

A stock market index is a mathematical construct based on the value of the stocks within a part of a stock market. It cannot be invested in directly, but supports derivatives and other financial instruments, and funds based upon its existence.

While an index’s primary function is to measure the performance of its underlying stocks, allowing analysis and benchmarking, increasingly indices are being used for pooled investment either through tracking in index funds or through the powerful ETF sector and through the filtration process of selecting specific factors.

And the IIA’s latest survey, the fourth since its launch, finds that ESG is dominating the business. The number of ESG indices globally rose by 40.2 per cent in the past year following a 13.9 per cent rise from 2018 to 2019, registering the highest year-on-year increase in any single major index class in the survey’s history. 

Rodolphe Bocquet, Global Head of Sustainable Investment at Qontigo talks in this report about the role of ESG investing going forward and how Qontigo is developing the next generation of indices.

“We are convinced that ESG indices are going to become the new normal,” says Bocquet. “The latest climate benchmarks published by the EU Commission are creating a regulatory revolution and they will be key to supporting the tremendous growth that we see in sustainable investment.”

Fixed income growth has also been steady, with a nearly 15 per cent rise in the number of indices measuring global bond markets over the past two years, with notable growth in the ESG sector as product issuers look to build more-diversified and ESG-compliant products.

The Index Standard’s Black, believes that it is really the indices behind the ETF products that drive returns and when thinking about an allocation to ETFs, investors should start first by identifying the most robust and well-designed indices. 

“It used to be that with high fees at 1.5 or 2 per cent, it was a simple case of picking a low fee ETF product. But now with the average fee around 19 basis points, it is the performance of the index itself that should come under scrutiny.” 

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Beverly Chandler
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