One of the key arguments for investing in indices is often cited as transparency of the index rules. But how transparent are these rules in practice and how reliable is their application? In this article, we will examine the management practices for two groups of indices: a group of the widely used blue-chip indices and the newer area of sustainability (or ESG) indices.

While indices depend upon a number of rules to function, all of which are generally associated with the promotion of transparency, this article will focus only on those rules which determine the composition of the respective indices, as well as those handling the treatment of major corporate actions affecting the index composition. Similar arguments can, however, be made for all other aspects of the index calculation as well, even though the effects may be less visible to the general investor.

Read more: Index committee or index rules? Examining different approaches to index management