What is the best way to cook an egg? Scrambled? Fried? Poached, perhaps? That is, of course, an impossible question because the correct answer is completely dependent on what you want the end result to be.
The same is true with index construction.
What is the best way to build an index? Market cap weighted? Sector weighted? Equally weighted? Or maybe one of the other myriad smart-beta strategies prevalent in the market today? The right answer depends completely on what you want the characteristics of your finished product, in this case the index, to be. Are you after lower volatility? Higher growth? Broader diversification?
Amid all of these potential strategies, it is one of the simplest, oldest, and elegant that quite possibly is also one of the most beneficial: the equally weighted index.
In this paper written by Shane Enete, CFA, with Biola University’s Inspire Research Institute for Biblically Responsible Investing, you will be introduced to the history of indexing, how the “traditional” indexes came to be and why there might be a better way.
Shane Enete has worked as an assistant professor of finance at Biola University since 2015. Prior to that, Enete was an investment research professional for 10 years for large institutional asset managers. His duties included valuing public stock securities, modeling asset allocations, and serving as a forensic accountant. Enete currently holds the Chartered Financial Analyst (CFA) designation and was awarded the Chartered Alternative Investment Analyst (CAIA) designation in 2014 (lapsed). Enete holds a B.S. in Finance from the University of Southern California and a M.S. in Mathematical Finance from the University of North Carolina, Charlotte. Enete also received a Ph.D. from the financial planning program at Kansas State University. His research interests include Biblically Responsible Investing (BRI), charitable giving, modeling financial well being, and behavioral finance.
Shane is married to Tammy, and is father to Sage and Silas. He enjoys any activity near the beach, or in the water, including surfing, swimming, beach volleyball, and triathlons. He hopes that when his kids turn 5, which is the minimum surfing age, they will both fall in love with surfing so that he can have whole family surf sessions.
What is the best way to cook an egg? Scrambled? Fried? Poached, perhaps? That is, of course, an impossible question because the correct answer is completely dependent on what you want the end result to be.
The same is true with index construction.
What is the best way to build an index? Market cap weighted? Sector weighted? Equally weighted? Or maybe one of the other myriad smart-beta strategies prevalent in the market today? The right answer depends completely on what you want the characteristics of your finished product, in this case the index, to be. Are you after lower volatility? Higher growth? Broader diversification?
Amid all of these potential strategies, it is one of the simplest, oldest, and elegant that quite possibly is also one of the most beneficial: the equally weighted index.
In this paper written by Shane Enete, CFA, with Biola University’s Inspire Research Institute for Biblically Responsible Investing, you will be introduced to the history of indexing, how the “traditional” indexes came to be and why there might be a better way.
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