Funds & wrappers
Index
A rules-based list of securities used to represent a market or segment of one.
How it works
An index is defined by its rules: what qualifies for inclusion, how holdings are weighted, and when it is rebalanced. Those rules are decisions, not neutral facts.
Most major indices weight by free-float market capitalisation, meaning the largest companies dominate. Equal-weighted and fundamentally weighted alternatives exist and behave differently.
Where it misleads people
Index membership changes are announced in advance, so trackers are known to be buying or selling on a known date. That predictability has a measurable cost.
Related terms
- Index fundA fund that aims to match an index rather than beat it, at very low cost.
- Market capitalisationWhat the market says a whole company is worth: the share price multiplied by the number of shares.
- Free floatThe portion of a company’s shares that is actually available to trade in the market.
- BenchmarkThe index or reference portfolio you measure yourself against, to see whether your decisions added anything.
- RebalancingSelling what has grown and buying what has lagged, to return the portfolio to its target mix.
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