International Equity Benchmark

When a firm is closely held or there is cross-holding, the floating (or free float) shares that available for trading is much less than the total cap. Therefore, adjustment has to be made for cap-weighted index.

Cross-holding double counts the values. In the extreme case, there can be no tradable securities but the cap is unchanged (e.g. buyout all the outstanding shares of the other company). In cross-holding, there is NO recursive math problem. Because when company A tries to hold a share of Company B, it has to use its equity to exchange for. So its total value is unchanged. So when B also does so, A’s holding on B’s asset is still the same.

Breadth: % of firms in the sector/market covered

Investability: Liquidity measure

Breadth and investability is a trade-off in international market

Index Reconstitution: Adding/deleting securities to/from an index

Crossing: match the selling and buying orders (index) of clients without broker to reduce transaction cost

Popular index makes crossing easier and lower transaction cost to follow due to liquidity

During index reconstitution, it generates price pressure (reconstitution effect). More popular index has more price pressure. However, easier to do crossing and lower transaction cost.

Free Floating Adjustment: precise float adjustment vs band adjustment

Objectivity: a set of rule of how to include securities in an index

Transparency: let the set available to the portfolio managers to track

More transparent will lower the tracking cost

For index at the margin of emerging/developed:

1. Put in emerging market index will generate upward bias
2. Put in developed will help to attract more capital for growth