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Duration: 6:25

Level: Beginner

Contributed By: FTSE Russell

The Main Goals:
Understand why index selection matters; comprehend how indexes serve as the basis for index-tracking investment products; and find out why index governance is important.

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Study Notes:

Why does index selection matter?

In evaluating the appropriateness of an index, investors should take a holistic approach and explore, for example:

  • How well the index strategy suits their objectives
  • How well it complements their beliefs
  • How well it interacts with allocations across the rest of the portfolio
  • Risk constraints

The index attributes you should consider can also depend on how the index will be used. Indexes as benchmarks: Why index selection matters

Indexes as the basis for index-tracking investment products: Why index selection matters.

Why is index governance important?

It is important for an index provider to have a formal governance system in place to proactively evaluate their indexes to ensure they are responding and adapting to the evolving market. Meanwhile, consideration must also be given to the fact that frequent implementation of index methodology enhancements can be burdensome to the end user. The index governance process must weigh the pros and cons when contemplating changes that may have a downstream impact on index users.

Methodology changes and other index enhancements should be reviewed, considered, and approved within a well-defined governance framework that draws from internal expertise, as well as external independent committees of leading market participants.

FTSE Russell Indexes

Disclosure: Interactive Brokers

Information posted on IBKR Traders’ Academy that is provided by third-parties and not by Interactive Brokers does NOT constitute a recommendation by Interactive Brokers that you should contract for the services of that third party. Third-party participants who contribute to IBKR Traders’ Academy are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from FTSE Russell and is being posted with permission from FTSE Russell. The views expressed in this material are solely those of the author and/or FTSE Russell and IBKR is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation to buy, sell or hold such security. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Stock Symbols

Any stock, options or futures symbols displayed are for illustrative purposes only and are not intended to portray recommendations.

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