- Reflects the market trends more rationally; takes into consideration only those shares that are available for trading in the market
- Makes the index more broad-based by reducing concentration to top few companies in index
- Aids both active and passive investing styles
o Aids active managers by enabling them to benchmark fund returns vis-à-vis an investible index, enabling an apple-to-apple comparison thereby by facilitating better evaluation of performance of active managers
o Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them t track the index with the least tracking error.
- Improves index flexibility in terms of including any stock from the universe of listed stocks, improving market coverage and sector coverage of the index.
o For eg, under a Full-market cap methodology, companies with large market cap and low free-float can’t generally be included in the Index because they tend to distort the index by having an undue influence on the index movement.
o However, under the Free-float Methodology, since only the free-float market cap of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.
- Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same
o MSCI, a leading global index provider, shifted all its indices to the this methodology in 2002
o The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FII) to track Indian equities, is also based on the Free-float Methodology
o NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) – QQQ is based on the Free-float Methodology
- Makes the index more broad-based by reducing concentration to top few companies in index
- Aids both active and passive investing styles
o Aids active managers by enabling them to benchmark fund returns vis-à-vis an investible index, enabling an apple-to-apple comparison thereby by facilitating better evaluation of performance of active managers
o Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them t track the index with the least tracking error.
- Improves index flexibility in terms of including any stock from the universe of listed stocks, improving market coverage and sector coverage of the index.
o For eg, under a Full-market cap methodology, companies with large market cap and low free-float can’t generally be included in the Index because they tend to distort the index by having an undue influence on the index movement.
o However, under the Free-float Methodology, since only the free-float market cap of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.
- Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the same
o MSCI, a leading global index provider, shifted all its indices to the this methodology in 2002
o The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FII) to track Indian equities, is also based on the Free-float Methodology
o NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) – QQQ is based on the Free-float Methodology
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