Building a Better Market Index

Suppose you wanted to construct a new index to track the US stock market. What would you use as a model?

The Dow Jones Industrial Average might be an option, but it’s hardly representative of the breadth and variety of American businesses. Or you could start with the S&P 500, but that also would confine your index to an arbitrary number of stocks, not to mention that stocks on the very bottom rungs of the S&P 500 change now and then, increasing trading costs as money managers adjust their portfolios to match.

In 2012, the Center for Research in Security Prices, a nonprofit owned by the University of Chicago, built on the success of its research indexes—used by academics around the world for more than 2,000 papers a year—to create commercial market indexes that reflect the way money managers actually invest.

“What was on our minds was the link to practice,” recalls Lubos Pastor, the Charles P. McQuaid Distinguished Service Professor of Finance. “How could we take the CRSP research indexes and modify them to make them useful to practitioners?”

John C. Heaton, the Joseph L. Gidwitz Professor of Finance, codeveloped the CRSP market indexes with Pastor over a decade ago. “The research certainly says indexes are the way to do investing in terms of general performance,” Heaton says. “There’s also quite a bit of research that says if you do a lot of trading, it destroys returns. Our indexes can be tracked without a lot of trading because we are not beholden to numbers of securities.”

Heaton and Pastor drew inspiration from the 2002 paper “Index Rex: The Ideal Index Construction” by George U. “Gus” Sauter, MBA ’80, to define growth and value stocks. “They read that as background, ran the data, and came up with what I thought were pretty elegant solutions,” says Sauter, former global chief investment officer at Vanguard Group. CRSP launched its investable market indexes in 2010 in partnership with Vanguard, and Sauter led the implementation.

The first of the indexes, the Total Market Index, was created to be “holistic, representative, and unbiased,” says Eric Frait, managing director of business advancement at CRSP.

As of November 2024, the Vanguard Total Stock Market Index Fund, which tracks the CRSP index, held $1.8 trillion in assets. With the addition of five new indexes in 2023, CRSP now has 44 market indexes organized by market cap, sector, growth and value stocks, and environmental, social, and governance factors.

All of this work built on the original CRSP research by Professors James Lorie, PhD ’47, and Lawrence Fisher, AM ’55, PhD ’56 (Economics). In the early 1960s, they painstakingly collected every transaction of every publicly traded stock on the New York and American stock exchanges. A young Eugene F. Fama, MBA ’64, PhD ’64, now the Robert R. McCormick Distinguished Service Professor of Finance, used it in his work on the efficient markets hypothesis, effectively changing the study of finance into a science.

An advantage of the CRSP data is that it accounts for the fact that stocks of failed companies no longer exist, removing “survivorship bias.” CRSP also differentiates itself by charging money managers comparatively modest fees relative to other index providers.

“What I hope others will find appealing about the CRSP indexes is that they provide state-of-the-art methodology at a low cost,” Pastor says. And revenue generated by the indexes supports the university—funding future research that will benefit finance professionals.

CRSP was shortlisted for the 2025 Index Provider of the Year Award by etf.com. The winner will be announced in New York on April 23.