Islamic Capital Markets and Products

APPENDIX BA Note on Market Index Providers

Concentration in the number of index providers is quite dramatic, the market being dominated by only four providers, S&P provides indices for around USD4.3 trillion of US fund assets, Barclays, which dominates bond indices provides them for USD3.0 trillion, Russell for USD2.3 trillion and MSCI for USD2.2 trillion.

Given the size of the assets under management of these tracker funds and ETFs, any change in an index is likely to have significant effects on asset markets. Changes are nevertheless frequent and final decisions on re-weighting of assets in an index are controlled by the index provider.

For equity indices such as the S&P 500 index, the changes in the index over time are very substantial; only 36 percent of the companies covered by it today were in the index in 1994 and the composition by industry has also changed with technology companies rising over that period from 8 percent to 13 percent. Moreover, the different index providers have very different indexation processes; while S&P update their S&P 500 index 20 times a year, Russell indices are updated only once annually.

Bond indices are one particular issue, weighted as they are by the amount of tradable debt a country or company has issued, which means that the more heavily indebted a bond issuer becomes the bigger the share it takes in the index. Funds that passively track indices are therefore effectively forced to become exposed to these highly indebted issuers. For ...