How Popular Market Indexes Are Constructed with Athanasios Psarofagis
Nov 22, 2023
auto_awesome
Bloomberg's index construction expert, Athanasios Psarofagis, takes a deep dive into popular market indexes. Topics include the details of how indexes like S&P 500 and NASDAQ are built, the Russell and S&P value and growth indexes, and how index construction impacts investor returns.
Understanding the differences in index construction is crucial in evaluating investment exposure
Some passive ETFs contain elements of active management, blurring the line between passive and active strategies
Investors should consider the cost, index methodology, and diversification benefits of ETFs when building portfolios
Deep dives
Index Methodology and ETF Landscape
The podcast episode discusses the importance of understanding index methodology and the ETF landscape. It emphasizes the need for investors to be aware of the differences in how indices are constructed and the potential impacts on their investment exposure. The focus is on major equity indices, international indices, and fixed income indices. The episode highlights the significance of considering index methodology and construction when making investment decisions.
The Impact of Active Elements in Passive ETFs
The episode explores how some passive ETFs may have elements of active management embedded in their strategies. It discusses the blurring lines between passive and active management and the impact on investor portfolios. The episode emphasizes the need to understand the level of active management within ETFs and the potential benefits or drawbacks associated with this approach.
The Growth and Importance of ETFs
The episode highlights the continued growth of ETFs and its impact on the investment landscape. It discusses the increasing popularity of ETFs among investors and the changing dynamics of the industry. The episode emphasizes the importance of considering the cost, index methodology, and diversification benefits of ETFs when building investment portfolios.
Different construction methodologies of stock indexes
The podcast discusses the different construction methodologies used for stock indexes like the S&P 500, Russell 2000, and S&P Small Cap 600. It is revealed that while the Russell 2000 focuses on taking the bottom 2000 companies based on their market cap threshold, the S&P Small Cap 600 follows a more stringent approach by requiring small-cap companies to have four quarters of profitable earnings. This difference in construction leads to varying exposure to growth and value stocks within the indexes.
Rise of innovative ETFs and investment strategies
The podcast explores the rise of innovative ETFs and alternative investment strategies. It mentions the increased usage of derivatives in ETFs, particularly for yield generation and risk management purposes. The discussion highlights the importance of understanding the methodologies and objectives of these alternative ETFs. Additionally, the podcast touches on the potential for factor-based investing in fixed income and the need for more index innovation in the fixed income space. The conversation concludes by emphasizing the significance of cost and the need for investors to be aware of what they're buying and to focus on costs and diversification when making investment decisions.
Most investors reference the returns of popular indexes frequently. But most also do not understand the details of how those indexes are constructed. In this episode, we take a deep dive into index construction with Bloomberg's Athanasios Psarofagis. We start with basic indexes like the S&P 500 and NASDAQ and move to more complex ones like the Russell and S&P value and growth indexes. But in all cases, we look at the behind the scenes details of how the index is built and how that impacts the returns they generate for investors.
We hope you enjoy the discussion.
SEE LATEST EPISODES
https://www.validea.com/excess-returns-podcast
FIND OUT MORE ABOUT VALIDEA
https://www.validea.com
FIND OUT MORE ABOUT VALIDEA CAPITAL
https://www.valideacapital.com
FOLLOW JACK
Twitter: https://twitter.com/practicalquant
LinkedIn: https://www.linkedin.com/in/jack-forehand-8015094