What are optimised indices?
A type of market index tracked by an index-linked investment fund or an exchange-traded fund.
Because it can be expensive and time-consuming to track every single security in a given market (known as 'full replication'), an optimised index includes a broad selection instead, in an effort to represent the market as accurately as possible. Many such indices are often constructed using the more liquid stocks.
Where have you heard about optimised indices?
Although it's not an everyday term in the financial world, you may come across optimised indices when you assess the features of different index-linked investment funds. Your financial adviser may have drawn your attention to products based on optimised indices.
What you need to know about optimised indices.
Full replication of a market can incur heavy charges. So, an optimised index aims broadly to reflect the wider market while reducing tracking error to an absolute minimum.
Experts say that optimised indices can work well for smaller funds. On the other hand, despite their best efforts, they can still contain quite high tracking errors and face volatility risks.
Optimised indices such as the Nasdaq-100 Data Explorers Optimised Index 'screens out stocks [in the original Nasdaq-100 index] that are either lacking in liquidity or relatively expensive to borrow in the stock lending market', according to Nasdaq.
Find out more about optimised indices.
For more on how tracker funds work, see our definition of tracking difference.