At the most simple level, an index is a measurement tool, tracking the value and performance of a particular market or market segment. Increasingly indexes are used as the basis of investment products such as exchange traded funds (ETFs), which allow investors to be able to follow the trends of a specific group of, for example, shares, bonds or commodities, as well as specific regions or countries without having to invest in each individual stock.
An index is made up of a collection, or basket, of securities and the individual stocks within it are weighted in relation to their size to ensure that the index accurately reflects the market or segment it is intended to represent. Traditionally, index constituents have been weighted using a company’s free
float market capitalisation but other weighting mechanisms are also possible.
The FTSE 100 and FTSE 250 are components of the FTSE UK Index Series - designed to provide investors with a comprehensive and complementary set of indexes which measure the performance of the major capitalisation and industry segments of the UK market. The series also includes the FTSE All Share Index which was created in 1962 and currently includes 636 eligible companies listed on London Stock Exchange. This week FTSE Russell will undertake one of its four quarterly UK Index Series reviews, where companies can effectively be promoted and demoted to and from the component indexes based on their market capitalisation.
To be eligible for inclusion in the FTSE UK Index Series a company must be incorporated in the UK and have at least 25 per cent of its shares available for public trading on London Stock Exchange - this percentage is known as the company’s free float. International firms that aren’t incorporated the UK must still have a listing on London Stock Exchange but their free float has to be over 50 per cent in order to be eligible for membership.
The rules for adding and deleting securities at the quarterly reviews are designed to provide stability in the selection of constituents of the index series, while ensuring that the indexes continue to be representative of the market, by including or excluding those securities which have risen or fallen
A company in the FTSE 250, for example, would need to have a market capitalisation higher than the 90th ranked firm in the FTSE 100 before it would be considered eligible for promotion. Similarly a company in the FTSE 100 would need to have a market capitalisation lower than the 111th company before it was automatically demoted to the FTSE 250. This ensures that the makeup of each index is representative but reduces an unnecessarily high churn of companies at each quarterly review.
Despite growing internationalisation, the UK Index Series is still seen an important bellwether of the UK economy. Companies justifiably promote their inclusion in these flagship indexes, with market participants keenly monitoring for any changes. It is important that the indexes adhere to
the highest levels of governance and transparency and that FTSE Russell maintains its roster of independent advisory committees in order to ensure the highest levels of investor confidence.
FTSE Russell will announce the constituent changes to the FTSE 100 and FTSE 250 after markets close on Wednesday.
At the last reshuffle, Bardford-based Morrisons rejoined the FTSE 100 index of leading shares following a sharp jump in its share price on the news it had signed a lucrative deal with internet giant Amazon.
Promotion to the FTSE 100 was a shot in the arm for CEO David Potts and his new team, who are working hard to rectify the mistakes of the previous management.
Morrisons was kicked out of the FTSE 100 index at the end of last year following a sharp drop in its share price.