The creation methodology and performance of an index is just as important to investors as the selection of an active portfolio.
An index for a passive portfolio must be rules-based, transparent, and investable.
Equal weighting produces higher volatility than cap weighting due to small-cap bias.
An index with many constituents will tend to create higher tracking error as the manager may struggle to fully replicate it.
Securities lending can increase returns and offset costs but carries counterparty risk and collateral risk.
Securities borrowers pay cash to the lender in lieu of dividends, the lender rebates a specified return on the cash held as collateral.
Borrowers formally own the borrowed securities and retain voting rights but have to return the shares at the lenders request.