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Lesson 8 of 8 · 12 min
Composite, theme, ESG and factor equity indexes
Most broad equity indexes are float-adjusted cap-weighted and split by size from a composite; narrower sector, theme, ESG, equal-weighted and factor indexes answer the biases of cap weighting and serve as benchmarks and the basis of index products, including multi-market products that carry currency risk.
In short
- Indexes are used to track risk and return, evaluate and benchmark managers, and build indexed products.
- Most broad-based indexes hold the largest listed firms, float-adjusted and market-cap weighted. A composite index covers more than 90% of a market and is split into large-, mid- and small-cap indexes.
- Cap-weighted indexes are dominated by the biggest (and best-performing) firms and by concentrated industries, which drives demand for sector indexes.
- Theme indexes follow investor trends (domestic consumption, infrastructure, Islamic-law compliance, ESG); ESG indexes exclude activities and then drop the lowest-scoring firms.
- Equal-weighted indexes give every constituent the same weight; fundamental factor indexes (e.g. quality) weight by a statistical score built from several fundamentals.
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