The world is changing quickly. From accelerating cross-border capital flows to the rise of emerging markets, the world investors must grasp and understand today is radically different from that of 20, or even 10, years ago.

For this reason, it’s critically important for investors who use indexes to understand the process that index providers use to govern the creation and ongoing management of their indexes. As the influence of passive investing has grown, index providers are increasingly at the forefront of major market changes and are expected to make objective, well-reasoned, and thoughtful judgments on index methodology to ensure that the indexes they oversee accurately reflect evolving global markets.

For example, FTSE Russell has been on the leading edge of providing access to the growing China A-shares equity market to help institutional investors gradually build their position as foreign investor quotas increase. FTSE Russell created a separate family of China A-share inclusion indexes to help institutional investors build a gradual position in China A-shares so as not to distort the market through significant inflows.

FTSE Russell also takes a highly active role in defining size (i.e., small, mid, large) and market classification (i.e., frontier, emerging, developed) criteria for its global equity indexes to aid investors in portfolio construction. By clearly outlining asset allocation building blocks through index exposures, we enable investors to better balance market and size exposures and avoid gaps.

These are two examples where the index provider is making adjustments to its global indexes that may impact billions, even trillions, of investment dollars. We must be reasoned in our approach and follow a consistent governance process. For FTSE Russell, this means understanding key drivers in the market, seeking input from a wide range of market participants, and implementing index policy and developing index products that address investor needs in a responsible way.

I encourage all investors to fully understand the process governing the decisions their index providers are making and the index methodologies they are designing. Are they transparent? Do they seek input from all market participants? Do they clearly communicate their decisions? Are they governed by what is right for the end investor? At FTSE Russell, we consider all these things of paramount importance in helping our clients make better investment decisions.

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These are especially high in emerging markets.
  • The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
  • London Stock Exchange Group companies include FTSE International Limited (“FTSE”), Frank Russell Company (“Russell”), MTS Next Limited (“MTS”), and FTSE TMX Global Debt Capital Markets Inc. (“FTSE TMX”). All rights reserved. “FTSE®”, “Russell®”, “MTS®”, “FTSE TMX®”, and “FTSE Russell” and other service marks and trademarks related to the FTSE or Russell indexes are trademarks of the London Stock Exchange Group companies and are used by FTSE, MTS, FTSE TMX, and Russell under license. All information is provided for information purposes only. No responsibility or liability can be accepted by the London Stock Exchange Group companies nor its licensors for any errors or for any loss from use of this publication. Neither the London Stock Exchange Group companies nor any of their licensors make any claim, prediction, warranty, or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Indexes or the fitness or suitability of the indexes for any particular purpose to which they might be put.
  • Opinions expressed by Mr. Horton are his own and do not necessarily reflect the views of Vanguard or its management.