There is an old saying that if life insurance were called “death insurance” no one would buy it. Semantics play a huge role in investing. Some of the longest lasting debates are often about definition and verbiage. Just utter the phrase “efficient markets hypothesis” and wait for the sparks to fly. Mention “smart beta” and a melee could ensue.

Another example, is the active vs. passive debate. Active is good, it implies agency and action. Passive is bad, no one wants to be perceived as passive. Hopefully the active vs. passive debate is finally fading from view. John Bogle is famous for saying this debate is about high cost vs. low cost, not active vs. passive. Cullen Roche at Pragmatic Capitalism has written extensively on the idea that (purely) passive investing is a myth.

Until we get this portfolio we are all making active investment decisions whether we like it or not. However out of the rise of index investing comes another situation where a phrase no longer means what it once did. For anyone who has been in the investment management industry for any amount of time the following statistic might blow you away.

The Index Industry Association (IIA), a trade association for the index industry, has published the results of its second annual global index survey. The results suggest that there are 3.727 million indices globally, an increase of approximately 438,000 indices since the survey was first conducted in June 2017.

Most people in the US, if they can name one index, could name the Dow. That’s likely it. Given the growth in the number of indices the question is why so many? If you think of an index as broadly measuring the performance of an asset class, then nearly 4 million indices boggles the mind.

Matt Levine at Bloomberg View inspired this post by talking about this very issue: not whether there are too many indices but are what we calling indices misleading investors? I suggest you read the whole note but this quote below captures Levine’s argument:

But the rise of index funds has led to a demand for indexes that are intended to represent things other than the market as a whole, and that in many cases are intended not to be the market but to beat the market.

And so now basically any decision process that can create a list of stocks counts as an index. The term “index” has expanded from meaning “representative list of stocks” to mean “any mechanical process for choosing stocks” and also now “any process at all for choosing stocks”: A list of stocks, written down by a manager based on subjective criteria and changing at that manager’s discretion, can also be an index.

For a long time, ETFs were synonymous with indexing. That is until, the ETF issuers realized that they couldn’t charge all that much for plain, vanilla index exposure. Thematic ETFs, i.e. narrowly drawn strategies focused on a hot sector or theme, were one of the first areas where index providers stretched the definition of what an index means.

There is nothing inherently wrong with active investing, whether it be done on a discretionary basis by a real, life portfolio manager or through quantitative strategies. What matters is that in both cases, portfolios are built that differ in meaningful ways from the overall, reference asset class. Investors need to inform themselves about what they own, because the label need not agree with the contents.

Clearly the cat is out of the bag on the whole, an index being pretty much whatever you want it to. As we have seen language changes and our use of certain terms go in and out of favor. I don’t know what word or phrase will supplant, index, but here’s hoping it can distinguish among nearly 4 million examples.