Stock market indicator and financial data view from LED. Double Stock market indicator and financial data view from LED. Double exposure financial graph ID 82217699 © Phongphan Supphakankamjon | Dreamstime
The rise in the popularity of exchange traded funds is only a part of the phenomenon

There are now more than 70 times as many stock market indices as there are quoted stocks in the world, according to a groundbreaking survey by the Index Industry Association. A census of its members found that they publish and regularly re-calculate 3.28m indices, of which 3.14m cover stock markets. According to the World Bank, there are only 43,192 public companies in existence.

The numbers show how important analysing markets from the “top down” has become, replacing traditional analysis of the individual stocks from the “bottom up”. They may also raise concerns that indices have over-proliferated and could become a source of confusion.

The rise in the popularity of exchange traded funds, which are linked to public indices, is only a part of the phenomenon. There are still only 7,178 ETFs and other exchange-traded products globally, according to the data provider ETFGI.

Benchmarking — where active investors use indices to help analyse markets and assess their own performance — is driving the indexing industry more than the demand to use indices in investment products.

The 3.3m indices are compiled by only 14 different companies, which together form the Index Industry Association, a trade group set up in 2012. “There are economies of scale,” said Rick Redding, chief executive of the association. Once companies have arranged the data feeds and the computing power to calculate one index, it costs very little to calculate extra indices, and this has led to much of the proliferation. “One of the things we’ve been concerned about is making sure that things like regulation don’t artificially constrain the number of players. There is a lot of competition and investors want to see that continue.”

Equity indices have proliferated in response to a demand to show currency effects, and are not usually calculated in numerous different currencies. Investors also demand indices divided by industrial sector, by the size of companies, and by a range of more esoteric criteria which can now easily be tracked using modern computers.

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These include investment “factors” — such as indices of stocks with high earnings multiples, or dividend yields, or sensitivity to the market — which are used as the basis for the commercially successful “smart beta” ETFs. Indices also now rank companies on environmental, social and governance (ESG) criteria.

However, these have only had a minor effect on the growth of indexing. “Despite recent attention on ESG and smart beta indices, they only represent less than 6 per cent of the overall market combined. There is much more interest in traditional market cap indices and our results show that industry and sector-specific indices are the most common,” said Mr Redding.

Global indices account for about 29 per cent of all equity indices, while the next most popular regions are the Asia-Pacific and Emea (Europe, the Middle East and Africa), while frontier and emerging indices account for 14 per cent. Even though the US accounts for more than half of the world’s stocks by market value, only 9 per cent of indices globally are restricted to the Americas.

While 96 per cent of indices cover equities, indexers have also branched into benchmarks for bonds, commodities, real estate and more exotic investments. Among fixed income indices the Americas represent approximately 33 per cent of the total indices available, while only 0.5 per cent follow frontier and emerging markets.

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