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.
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