Alternative Weight Indexing

This works’ aim is to review and evaluate past and current academic literature concerning efficient indexes for passive management. To this end, the increasing significance of passive investing in the U.S market is discussed as well as the merits and shortcomings of the capitalization-weighted index, which is predominantly used for this purpose. Based on the Standard & Poor’s (S&P) 500 constituents, a series of market capitalization independent indexes are constructed, and the impact of a change in the index weighting scheme is isolated. The focus of the comparison lies in a potential reduction in the standard deviation of the excess return over the benchmark and subsequently an increase in the information ratio, as each index shows a different exposure towards common risk factors. This work moreover highlights potential issues about practical implementation and illustrates the superiority and inferiority of distinct weighting schemes during various times of economic development.