Contrast the alternative ways of designing an index-based equity strategy

Designing an index strategy starts with the index itself. The investor picks the market segment (broad market, size band, style, region or sector) and then an index whose methodology fits: how constituents are selected, how often the index is reconstituted and rebalanced, and how it weights stocks. Float-adjusted cap weighting is liquid and low-turnover; price weighting is a historical quirk; equal weighting tilts towards smaller companies and needs frequent rebalancing; fundamental weighting uses sales, earnings or book value and tends to tilt towards value. A sound choice matches the exposure the client actually wants and can be held cheaply. The trap is ignoring investability: an index full of illiquid names or with frequent reconstitution raises trading costs and tracking error.