Investors can choose from security market indices representing various asset classes, including equity, fixed-income, commodity, real estate, and hedge fund indices. While proper use of any index is dependent on understanding their construction and management, it is also important to note the significant differences between asset class indices. Equity indices are the easiest to implement as they are based on securities that are typically highly liquid and easily priced. Fixed-income indices pose more of a problem due to limited liquidity, a massive universe of fixed-income securities, and imprecise value estimates. Commodity indices are usually based on baskets of futures contracts instead of actual commodity prices, and thus lack an obvious weighting method. Additionally, commodity indices with the same target markets often vary dramatically in composition. Real estate indices track illiquid and unique properties, while REIT indices track highly liquid securities that often correlate with price changes in other marketable securities. Finally, hedge fund indices lack the information to effectively track the broad hedge fund universe and often struggle with survivorship bias.
Reading 45 LOS 45k:
Compare types of security market indices