CFA Institute
07/30/2024 | Press release | Distributed by Public on 07/29/2024 18:46
A New Framework to Bring Clarity to Index Investment Products; CFA Institute
A New Framework to Bring Clarity to Index Investment Products; CFA Institute
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New York City, United States30 Jul 2024
The CFA Institute Research and Policy Centerhas developed a new investment classification framework and issued policy recommendations for regulators and firms to improve transparency, communication, and investor comprehension associated with smart-beta, direct indexing, and index-based investment products.
Detailed in research published today, the newly launched classification framework offers investment firms a tool to better communicate index-based products to clients by describing index-based strategies according to their level of active decision-making. It proposes a framework of indexing along a spectrum of strategies beyond traditional market capitalization weighting. The framework is based upon three dimensions of strategy, sources of returns, and level of discretion -- with the goal of increasing transparency among index-based investment products.
Accompanying policy recommendations emphasize the importance of transparency and clear disclosures around the active investment decisions involved in index-based products.
Rhodri Preece, CFA,Senior Head of Research, CFA Institute said:
"The notion of a simple bifurcation between active and passive investment products is outdated. Index-based strategies are varied in their design features and involve different layers of active decision-making, dispelling the historical distinction between active and passive management. As index-based products have proliferated, incorporating more complex features than market capitalization weighting, there is a need for greater transparency and improved investor comprehension of these strategies. This new frameworkintends to support investment advisers and end-investors through clearer disclosure and communication of the key features of index-basedproducts."
The research includes recommendations for investment firms grounded in the principles of improved disclosures for clients, including:
- Educate and inform investors of the active decisions made throughout the investment process for index-based investments.
- Communicate to investors about the decision-making processes involved in index fund creation, including security selection and weighting methodologies used in the creation of the investment product or strategy.
- Provide prospective clients with access to more detailed information on index product features as part of the pre-sale product literature.
The index investment products framework and policy recommendations are available in full at: https://rpc.cfainstitute.org/en/research/reports/2024/smart-beta-direct-indexing-and-index-based-investment-strategies.
Notes to Editors
Smart Beta, Direct Indexing, and Index-Based Investment Strategies: A Framework, is the first in a new three-part Index Investing series from the CFA Institute Research and Policy Center. Other research papers will include Beyond Active and Passive Investing: The Customization of Finance by Marc C. Reinganum and Kenneth A. Blay to be published by the Research and Policy Center Research Foundation in August. The Rise of Index Funds: Implications for Active Management, the third in the series, will be published by the Research and Policy Center later in 2024.
About CFA Institute
As the global association of investment professionals, CFA Institute sets the standard for professional excellence and credentials. We champion ethical behavior in investment markets and serve as the leading source of learning and research for the investment industry. We believe in fostering an environment where investors' interests come first, markets function at their best, and economies grow. Spanning nearly 200,000 charterholders worldwide across 160 markets, CFA Institute has 10 offices and 160 local societies. Find us at www.cfainstitute.org or follow us on LinkedIn and X at @CFAInstitute.
About the CFA Institute Research and Policy Center
The CFA Institute Research and Policy Center brings together CFA Institute expertise along with a diverse, cross-disciplinary community of subject matter experts working collaboratively to address complex problems. It is informed by the perspective of practitioners and the convening power, impartiality, and credibility of CFA Institute, whose mission is to lead the investment profession globally. Visit the Research and Policy Center at http://rpc.cfainstitute.org
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