The FTSE Group is a world leader in the creation and management of equity, bond and hedge fund indices. Their indices are used for investment analysis, performance measurement and the creation of index-based funds.
The company is an independently run enterprise owned by the Financial Times and the London Stock Exchange. While FTSE may not have the same cachet as Dow Jones and Standard & Poor’s in the United States, it offers many compelling indices that a number of exchange-traded funds (ETFs) have been developed to track.
Research was recently pleased to have Jerry Moskowitz of FTSE Americas join us to discuss the company and its products.
Research: How many indices does FTSE Americas manage? Moskowitz: FTSE Group calculates over 100,000 indices covering more than 48 countries and all major asset classes. Our flagship index, the FTSE Global Equity Index Series (GEIS), covers 98 percent of the world’s total investable market capitalization and includes a broad range of traditional and alternative asset class indices such as multinationals, infrastructure, socially responsible investment, real estate and hedge funds.
What are some characteristics of a well-designed index?A well-designed index is transparent, rules-based and liquid to ensure investabilty. FTSE has a set of standards that all of our equity indices must meet. First of all, they must have clear rules that are publicly available. All stocks within the indices must be free-float-adjusted and meet our liquidity screens. Finally, any and all index changes are clearly communicated. The results of index reviews and resulting changes are available on our website and communicated to clients and the press.
There’s been a proliferation of new stock indices and that has been followed by a lot of confusion. What’s the difference between a market index and an index designed to beat the market?An index, by definition, is designed to represent the market it follows. The FTSE 100, for example, covers the largest 100 UK companies as measured by their market capitalization (stock price times shares outstanding). When the market is up, so is the index — and when the market is down, the index is down as well.
When you refer to an index designed to “beat” the market, you are describing what we call “investment strategy” indices. These are alternatively weighted indices like the FTSE RAFI series, which weights company size by sales, cash flow, book value and dividends as opposed to market cap. In many instances, particularly during the collapse of market bubbles, these indices outperform traditional market-cap-weighted indices.
Another way that investors sometimes use indices to “beat” the market is to use “alternative investment” indices. These include indices that cover well-performing and/or rapidly growing markets or market segments, such as China A shares, real estate or infrastructure. There is no guarantee that any of these indices will outperform, however. They are calculated to follow a specific segment of the market, and as with any index, past performance does not guarantee future results.