BGN Entrepreneur

According to FTSE Group, a leading index provider, that the innovative methods of index construction will supplant traditional market capitalization-weighted indices as the dominant driver of equity benchmarks within 20 years.
At present almost all the trillions of dollars benchmarked against equity indices worldwide are based on market-cap weighted indices such as the FTSE 100, S&P 500 and MSCI World, in which companies are weighted according to the value the market ascribes.
However, critics say this means investors have to hold too much of stocks that are temporarily over-valued and too little of undervalued stocks, and portfolios can be dominated by a few large companies.
As a result a number of alternative approaches have emerged in recent years, such as fundamental indices, in which stocks are weighted by metrics such as book value, dividends and sales, and minimum variance, in which portfolios are designed to reduce volatility.
FTSE will expand this range by launching a family of Risk Efficient indices, designed in conjunction with France’s Edhec Risk Institute, which aims to deliver the highest Sharpe ratio, a measure of risk-adjusted return.

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