Financial market indexes are nearly a century old and their role has evolved over time. Initially, indexes were used as an information tool, primarily as a means of gauging business conditions and market sentiment. In the last few decades, indexes have assumed a central place in the investment business, both as a means of benchmarking investors’ performance and as the basis for index-based fund management.
In their role as benchmarks, the leading indexes now play a vital role in the global capital markets. For example, around $10.7trn of assets—including over two-thirds of active US equity institutional assets—are benchmarked to the Russell US indexes. Despite the variety of index choices now available to professional and retail investors, there are some design standards that any market-leading benchmark should follow. In particular, we believe that three important principles help define a good benchmark: objectivity, modularity and reliability.
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