Sum proposes an idea of having an equity index based on the entire universe of securities traded in an exchange.
There’s some problem with me, somehow I refuse to accept the things the way they are. Its not surprising I get along with few people and always keep all those around on the tenterhooks. Its confusing when new friends say they don’t understand me. I hate maintaining status quo on the rule of nature, law of world, rule of thumb kind of things and have landed my self in difficult situations more than once in challenging such authorities.
Nevertheless, getting back to business, I am pretty engrossed with the thought of why do we accept the benchmark indices like NIFTY, S&P 500 and FTSE which are value weighted index of certain specfic and representative stocks to track the overall movement of the market. I shared this with an avid investor who has blown up his bottom trading Nifty futures and his staunch reply was ‘you got any problems with that?’. Well yes I do have problems with accepting an index of representive stocks to track and guage the overall sentiment of the market. Maybe it’s the motivation to treat these index as the underlying for other financial instruments that keeps the index simple and make it relatively irrelevant or rather less important than the instrument for which it is the underlying.
I ain’t no research fellow, but it is not very insane to form the hypothesis that the stocks included in the index show different characteristics and form difeerent patterns when included in a benchmark index. Does this make the index biased ? Maybe not, but I still am not ready to buy the idea of having a benchmark index (with certain representative stocks) that tracks and gives a brief of what is happening in the overall equity marketplace.
The index culture came to being when IT industry was in infancy. The lesser the better was the norm and complex things were best avoided. Now the world hass changed, maintaining a 50 stock index is s easy as maintaining an index of complete universe of securitites trade on an exchange. So does having an index based on complete universe of securities traded on an exchange makes world aa better place of live in. Well; Certainly No, but it certainly dosen’t make it any worse either. So why not give it a shot.
Some say, the outliers may screw up the overall movement of the index (based on the entire universe), but that’s exactly why I want a complete universe index and not one based on some parameters out of the universe. The outlier effect in an index based on certain parameters taken out of the universe is more likely than otherwise.
No grudges agaisnt any representative index (rather they make my job a lot easier), but still I would like to see some financial innovation in this space. Having an index based on the entire universe of stocks would make the correlation of the index with the overall economy much more significant.
So what do you say ? How about a test drive with an index based on entire universe of traded stocks on an exchange.
