Cap weighted or smart beta? Factor or fundamental? Global or local market? Compared with just a few years ago, the range of indexes now available to market participants has grown massively. The proliferation of index types has brought major advantages to those wishing to analyze markets in a variety of ways. But the sheer multiplicity of choice can easily become confusing and even bewildering. Using key products from FTSE Russell’s full index menu, we have put together a visually intuitive infographic illustrating the relationship the different index types have to one another. A clear understanding of these relationships should help index users identify the best benchmark choice for their desired objective.
From the left to right the index continuum moves from the broadest cap weighted indexes through increasing degrees of index focus and complexity, into the newer and less familiar realm of smart beta.
The indexing continuum
Source: FTSE Russell, as at April 30 2016.
The graphic starts on the bottom left with our FTSE Global Equity Index Series, which offers comprehensive coverage of nearly every equity and sector relevant to international users’ needs. Of course, such a broad series can be deconstructed into several different types of building blocks, including regional, country, style, and size-oriented.
These subsets of the broad global equity index series are generally well known and understood. But confusion often begins near the peak of the arch in the graphic, where we depart from the more traditional market cap weighted indexing schemes and move into “smart beta” territory. The further to right you go on the continuum, the further away you move from pure cap weighting. As smart beta indexes go, equally weighted and dividend yield weighted approaches are relatively straightforward. Just as their names suggest, at each rebalance the former assigns equal weight to all index constituents, and the latter weights securities by dividend yield.
Following the index continuum farther to the right, more sophisticated approaches to alternative weighting add increasing layers of complexity. For example, the FTSE RAFI™ Index Series weights constituents using a composite of fundamental factors, including total cash dividends, free cash flow, total sales and book equity value. These transparent, rules-based indexes are designed to target specific index objectives such as volatility reduction or improved levels of diversification.
FTSE Russell’s alternatively weighted suite of indexes also includes minimum variance, which we recently compared to our low volatility factor index series to draw the distinction between fundamentally weighted and factor indexes. Single-factor indexes appear next in our graphic. They are designed to represent the performance of specific factor characteristics such as volatility, illiquidity, value and momentum. A growing number of investors are using these indexes to achieve strong, targeted factor exposures as the foundation for tactical or strategic allocation.
Finally, the most complex slice of the graphic highlights our multi-factor indexes, where factor indexes are taken to the next level and combined to create multi-factor indexes. These indexes are useful for investors seeking multiple factor exposures, as the index series utilizes a proprietary Tilt-Tilt approach to provide effective multi-factor capture.
While we hope this infographic can help clients better navigate the ever-growing index universe, with thousands of indexes calculated on a daily basis the graphic only represents a small cross-section of FTSE Russell index offerings. Please visit our website for more information and in-depth research to identify the indexes best suited for your investment objectives.
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