What are the new types of indexes?

Targeting style factors

Factor indexes aim to measure specific factors that may explain risk and returns of an asset. For example: volatility, yield, quality and momentum. These were first incorporated by investors who had access to unique data sets and state-of-the-art processing tools and techniques.

Factors exist in both equities² and fixed income³ . The metrics or measurements used will differ and be specific to the asset class, but the motivation will be similar.

Incorporating ESG dimensions

ESG indexes can be constructed in different ways. From simple exclusions such as removing higher ESG-risk securities, to more complex constructions where the index integrates ESG ratings.

They can also be constructed with an impact objective in mind, for example, around a specific topic, like sustainability or gender diversity, and include the securities with a greater exposure to that topic. A green bond index is an example of a fixed income impact index.

Index providers may select from a wide range of techniques when integrating ESG ratings. Institutional investors can choose the index and the methodology that is most optimally aligned with their goals and constraints.

Addressing climate change

Climate indexes help investors address the impact on climate change in their portfolios. They are grouped by objectives, for example, minimizing the exposure to carbon emissions and stranded asset risks, maximizing the weight of companies providing climate solutions, green opportunities, positive environmental impact, or targeting temperature alignment goals.

To address different investor use cases, a wide range of climate indexes can be used as the basis for products. They may be deployed for active or passive financial products, or they may be incorporated as policy or reference benchmarks by institutional investors.

Seizing long-term opportunities

Thematic indexes aim to represent the performance of companies that may derive revenue from opportunities generated from macroeconomic, geopolitical, and technological trends. These trends may be seen by investors as long-term, structural, and transformative shifts.

Traditionally, seeking to capture innovation and the potential of emerging trends has been seen as something that only active managers could do. But as data and technology evolved, there were new ways of measuring and representing the performance of these concepts in a quantitative and systematic manner. This led to the creation of thematic indexes.

Institutional investors can use thematic indexes in passive products that target a specific theme or themes, or in active solutions as a benchmark of performance.