Selecting a specific benchmark is an individual decision, but there are some minimum standards that any benchmark under consideration should meet. To be effective, a benchmark should meet most, if not all, of the following criteria:

  • Unambiguous and transparent – The names and weights of securities that constitute a benchmark should be clearly defined.
  • Investable – The benchmark should contain securities that an investor can purchase in the market or easily replicate.
  • Priced daily – The benchmark’s return should be calculated regularly.
  • Availability of historical data – Past returns of the benchmark should be available in order to gauge historical returns.
  • Low turnover – There should not be high turnover in the securities in the index because it can be difficult to base portfolio allocation on an index whose makeup is constantly changing.
  • Specified in advance – The benchmark should be constructed prior to the start of evaluation.
  • Published risk characteristics – The benchmark provider should regularly publish detailed risk metrics of the benchmark so the investment manager can compare the actively managed portfolio risks with the passive benchmark risks.