Passive Investing Trend Sees Number of Indices Pass 3.7 Million
Over the course of the 10 year equities bull run that followed the 2008 financial crisis, one of the major trends for private individuals investing online and institutional investors alike has been the rise in passive investing via indices. Indices group stocks together by stock exchange, country, size of market capitalisation, industry or sector, to name the main criteria and are compiled by specialist companies. Each stock in an index is assigned a weighting, most commonly based on its contribution to the index’s overall market capitalisation. The idea is that investors who buy the index track a particular market accurately without having to go to the trouble of buying weighted numbers of shares in all of the companies that make it up. The FTSE 100, Nasdaq, Nikkei are among the most well-known indices representative of national stock markets and the Faang+ an example of a sector index – big U.S. tech stocks. Indices can also be much more niche, such as indices for Emerging Markets small caps, companies categorised as ‘ethical’ or indices that track the legal marijuana market. The rising popularity of building an investment portfolio out of passive tracker indices has been based on two major catalysts. The first is that the environment over the last decade has been conducive – index investment is generally most successful during a bull market when everything is going up. The second has been the growing body of data-based evidence, or the growing trend of media awareness and willingness to publish it, demonstrating that only a very small minority of active fund managers consistently outperform their benchmark index once their higher fees are added into the equation. Investors have, on the basis of that knowledge, come to the conclusion ‘why pay those fees when there is a lower-fee alternative statistically likely to result in comparable or better returns’? The result of this move towards passive index investing is that the number of indices worldwide has now hit a staggering 3.7 million. 438,000 new market-measuring indices have been created over the past year alone, says data from the Index Industry Association. The industry body believes that the numbers reflect investment industry demand for more ‘fine-tuned benchmarks’. Interestingly, the number of stock market tracker indices has actually recently dropped – down 3% over the 12 months up to June this year. Providers have been discontinuing some less popular, niche sector indices. However, picking up the slack and driving total index numbers has been a rise in bond indices. The passive bond fund sector has so far lagged the equities equivalent but is now beginning to catch up. This kind of index has attracted $100 billion of capital over the last year while equities index inflows have slowed. But the fast growing sector in the index tracker market over the past year has been for index’s that group companies according to ESG (environmental, social and governance) standards. It saw 60% growth as private and institutional investors place more emphasis on not putting money into companies in sectors they do not support or operate their business according to principles that conflict with their own. While still a small part of the entire investment landscape, the rapid growth of passive indices that address ESG requirements has caught the industries attention. With indices now so influential across financial markets it may also prove to be a catalyst that forces companies to clean up their business ethics, fearing missing out on investor cash if omitted from a quickly growing group of indices. environmental, social and governance (ESG) standards.
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