Constructing Market Indexes – The Impact of Index Investing

Many people believe that stock indexes are “the market.” They believe that the indexes are passive and aren’t put together with human judgment and influence. But the indexes are the result of decisions of small, little-known groups of people, and their decisions have powerful effects on other people. This article explains some of the details, including the lengths companies will go to be included in indexes.

Something else that might be described as imbalanced: the growing clout of index providers such as MSCI, FTSE Russell, and S&P Dow Jones Indices. In a market increasingly characterized by passive investing, these players can direct billions of dollars of investment flows by reclassifying a single country or company, effectively redrawing the borders of markets, shaping the norms of what’s considered acceptable in international finance, and occasionally upsetting the travel plans of government ministers. (Bloomberg LP, the parent company of Bloomberg News, owns the Bloomberg Barclays-branded bond indexes, the most widely followed measure of fixed-income performance worldwide.)