Redesigning indices that track securities and commodities markets opens new strategic doors. In theory, that is. Proving it in practice is something else. But if financial engineers can build better benchmarks, and index fund managers launch products tied to those indices, that raises the possibility of improving asset allocation by using the new index funds. But success, or failure, rests on whether indices can be enhanced. That struggle usually boils down to the question: Is there a better alternative to capitalization-weighted indices?
A growing list of index vendors answer in the affirmative. Indeed, the last few years have witnessed an explosion of new benchmarks, many claiming the title of “new and improved” in one sense or another. Alas, it’s too soon to make definitive judgments one way or the other, but that doesn’t mean we can’t consider the strategic possibilities.
In the latest issue of Wealth Manager, your correspondent did just that. The question before the house: What, if anything, can new indices bring to the asset allocation table? For some thoughts on possible answers, read on…