Index Construction for Passive Equity Investing

Passive equity investing typically involves constructing and managing a portfolio that aims to replicate the performance of a specific market index. Understanding the principles behind index construction is crucial for effective portfolio management. Consider that you are tasked with creating an equity index for investors who prefer low-cost, diversified exposure to large-cap U.S. stocks.

In your response, describe the steps involved in constructing such an index, including any selection criteria you would use for the companies included in the index. Additionally, explain why these steps are important for achieving the goals of passive equity investment.