Breaking the rules in index construction
How bouts of volatility drove index providers to breach methodologies
In response to the market volatility and seizure in liquidity during the rebalance period, index providers made an interesting decision. For the first time ever, they abandoned their rebalancing rules.
Overall, such a decision has had – and will continue to have – a major impact on the market. As index providers disregard their standard rebalancing practices, we must contemplate the precedent they have now set for similar situations in the future. The inherent conflict is evident:
- Active managers believe the index providers should maintain fidelity to the rules set forth by those providers.
- Passive managers accept such lack of compliance with these traditional index provider guidelines; after all, they benefit from not being forced to sell in an illiquid market.
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