What Vanguard looks for in benchmarks
Index products and the benchmarks they seek to track have proliferated. But index providers' methodologies vary, so two benchmarks tracking the same market segment may deliver very different results.
We believe that selecting an appropriate benchmark is crucial to providing a best-in-class ETF. We use indices from FTSE and S&P as benchmarks for our Hong Kong-domiciled Vanguard ETFs™.
Benchmark construction best practices
Many index providers use benchmark construction best practices that Vanguard has promoted for years. We believe stock and bond benchmarks should:
- Be based on objective rules, not subjective judgment
- Include only shares and bonds that are available on the open market
- Reflect market size and style changes through orderly rebalancing
Additionally, stock benchmarks should use multiple criteria to categorise growth versus value stocks and buffer zones so that market-capitalisation divisions can overlap, with no hard cutoff points, to limit unnecessary turnover.
Benefits of well-designed benchmarks
Using best practices to construct benchmarks can deliver benefits to investors, including:
- Low portfolio turnover, which leads to lower transaction costs
- Better reflection of targeted markets, which can make index funds and ETFs efficient asset allocation tools
- Comparability among index products, allowing investors to choose benchmarks based on preference, cost and accessibility