Creating Protections for Index Investing

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Introduction and summary

In the world of finance, investors and other market participants use indexes for a variety of purposes. Stock market indexes, such as the S&P 500, constitute a gauge for the overall performance of the stock market. Multiple indexes follow other asset classes such as bonds, commodities derivatives, currencies, and more. Narrow indexes follow smaller segments of the marketplace, such as municipal bonds or biotechnology stocks. And specialized indexes that consider environmental, social, and governance (ESG) factors are becoming increasingly popular for investors.

An increasingly large portion of capital is being allocated according to indexes, often in the form of exchange-traded funds (ETFs). By using these funds, investors have effectively delegated their investment decisions to index providers. These decisions are essentially based on formulas, and the inputs—and even the…

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