Investors may like to grumble about traditional cap-weighted and debt-weighted indices, but new research shows they are still dependent on these tools.
More than two-thirds of institutional investment professionals surveyed by the Edhec-Risk Institute criticised traditional cap-weighted equity indices and more than half had gripes with debt-weighted bonds indices.
But less than half of the professionals have translated words into action. For equity indices, the adoption rate of alternative weighting schemes is 45%, for government bonds indices it is 18% and for corporate bonds it is 13%.
“Ultimately, investors consider that cap-weighted indices remain the reference and even when they adopt alternative forms of indices, they continue to compare the performance of the latter to that of the former,” said Edhec.
Only about half the respondents said it was important that an index fit with a “buy-and-hold” strategy. Edhec said the finding is interesting because the dominance of cap-weighted indices is often attributed to their buy-and-hold nature.
“This new attitude from investors opens the door to new approaches based on dynamic rebalancing rules, as long as these are transparent and systematic,” said Edhec.
Liquidity, objectivity and transparency are the most important criteria when selecting an index, said the survey.
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