Lesson 7 of 7 · All lessons in this module
- What an index is: value, price return and total returnVideo lesson
- Building an index: target market, constituents and weighting
- Price-weighted and equal-weighted indexesVideo lesson
- Market-cap, float-adjusted and fundamental weightingVideo lesson
- Rebalancing, reconstitution and what indexes are used for
- Types of equity indexes
- Fixed-income, commodity, real estate and hedge fund indexes
Lesson 7 of 7 · 14 min
Fixed-income, commodity, real estate and hedge fund indexes
Outside equities, indexes face harder problems: bond markets are huge, illiquid and dealer-priced; commodity indexes hold futures and pick their own weights; real estate trades rarely; and hedge funds choose whether to report at all.
In short
- Fixed-income indexes face three challenges: a huge universe, scarce pricing data (dealer markets, infrequent trades) and illiquidity. Maturing and new issues create turnover; replication is costly and difficult.
- Bond indexes are split by issuer type, financing type, currency, maturity, credit quality and inflation protection; types include aggregate, market sector, style, economic sector and specialized (high-yield, inflation-linked, emerging market) indexes.
- Commodity indexes hold futures contracts, have no natural weighting scheme, and differ widely in exposures; returns reflect the risk-free rate, changes in futures prices and roll yield.
- Real estate indexes are appraisal, repeat sales or REIT indexes; REIT indexes are priced continuously.
- Hedge fund indexes are mostly equal weighted; constituents decide whether to report, indexes overlap little, and survivorship bias pushes returns upward.
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