Russell Indexes outlines three broad design categories that investors will consider, including market coverage, construction approach and ongoing maintenance. Market coverage includes representativeness of the targeted are of the market and how the portfolio fits to a broader investment strategy. Construction approach includes weighting, objectivity and transparency. Ongoing maintenance includes regular rebalancing and corporate actions that will could change the make up of the index.
It is not enough for someone to go to an index provider and ask to make an index based on an investment strategy. Asset managers can go to an index provider to set unique parameters based on regions, sectors, theme, taxes, regulatory constraints, calculation methods or specific investment strategies to create the exact index needed, according to NASDAQ OMX.
New providers will also have to consider the type of investment base they are targeting. For instance, MSCI indices have acted as the benchmark choice for international equity ETFs for 88% of institutional investors, according to MSCI.
Asset managers who are thinking about putting their own strategy to work in an ETF wrapper can find more information on index provider selection at the upcoming ETF Boot Camp.