Indexing

Because index providers use varying methodologies, two benchmarks tracking the same market segment may deliver different results.

While approaches to benchmark construction vary, many index providers are adopting benchmark construction best practices that Vanguard has promoted for years, including:

• Objectivity. Benchmark construction is transparent and determined objectively.
• Accurate reflection of the market. The benchmark is the best representation of the target market or market segment and is free-float adjusted, which means it only includes shares or bonds that are available in the open market.
• Market-cap buffer zones. Market capitalization divisions overlap, with no hard cutoff points (for equity benchmarks).
• Multi-factor style analysis. Growth and value stocks are categorized using multiple criteria (for equity benchmarks).
• Timely and efficient construction. The benchmark's rebalancing approach reflects market changes in an orderly fashion.

The benefits of smart benchmark construction

Using best practices to construct benchmarks can deliver benefits to investors, including:

• Lower portfolio turnover.
• Lower transaction costs.
• Efficient asset allocation with limited overlap.
• Ability to choose benchmark based on preference, cost and accessibility.
• Potential for competitive performance relative to active management.