A Sector-Based Index for Risk-Averse Investors

This article introduces a new indexing methodology for sector-based portfolios (exchange-traded funds, or ETFs) and demonstrates that virtually all risk-averse investors would optimally choose to hold the proposed sector-based index (ETF). We provide empirical evidence supporting this approach and illustrate the methodology through several examples. A comparison with existing market-capitalization-based ETFs highlights both the practical advantages and the theoretical appeal of our proposed indexing methodology.