Post by Admin/YBB on Oct 17, 2021 12:06:15 GMT -6
Indexing
INDEX/PASSIVE investing is gaining vs active management. Indexing is low-cost, low-turnover, tax-efficient & easy to automate. On the other hand, indexing may take good with the bad, have limited selectivity, respond to events with long lags, and obviously aims for average performance; indexing also flows more money into large & rising stocks, so big get bigger.
MARKET-CAP based indexing is the most common (SP500, Nasdaq Comp/Nasdaq 100, Russell 1000/2000/3000; & from Wilshire, MSCI, FTSE, TSX, TOPIX, etc). It may use sampling or full replication; full market-cap or free-float; futures to manage cash flows; proceeds from securities-lending to reduce or eliminate (Fidelity ZERO funds) expense ratios (ERs); be uncapped or capped by stocks &/or sectors; change index & rebalance all at once (Russell indexes are notorious) or gradually (CRSP indexes); reinvest dividends daily or at month/quarter-end. So, index funds from different firms that follow the same index may perform differently for these reasons besides their different ERs. All indexes start at BASE values but then develop DIVISORS to ensure continuity when index components change, or splits occur. Another post will describe COMPLETION INDEXES.
Early indexes were PRICE-WEIGHTED indexes (DJIA, etc), or simple averages of prices. This was useful in the days before computers, but they still exist for marketing & business reasons; some copycats also exist (Nikkei 225). EQUAL-WEIGHT indexes are popular. Alternate weightings are also used. A broad approach is FACTORS-based or FUNDAMENTAL indexing. There were some industry frictions early on, mainly involving WisdomTree & Research Affiliates (RAFI indexes), on marketing issues. But it is accepted practice now to name factor(s) when only 1-2 factors are involved (size, value, growth, quality, minimum volatility, dividend (current or growth or blend), ESG, currency hedging, bond credit-quality, bond maturity/ duration, etc) & use the term fundamental indexing or multi-factor(s) indexing when 3 or more factors are involved.
Most fund firms license indexes from index specialist firms. But a recent trend is to use INTERNAL/ custom/ direct- indexing for limited use for individuals or groups but that may grow to replace some broad indexes. There are concerns about CONFLICTS of interest in that firms’ securities holdings may influence their internal indexing decisions, or the firms may trade ahead of making internal indexing decisions public (front-running).
TYPES of indexed funds include mutual funds/OEFs (growing rapidly); funds of index funds; target-date funds (TDFs; many are funds of indexed funds); CITs (collective/ commingled investment trusts); ETFs (most ETFs are still indexed). #PersonalFinance 10/17/21.
INDEX/PASSIVE investing is gaining vs active management. Indexing is low-cost, low-turnover, tax-efficient & easy to automate. On the other hand, indexing may take good with the bad, have limited selectivity, respond to events with long lags, and obviously aims for average performance; indexing also flows more money into large & rising stocks, so big get bigger.
MARKET-CAP based indexing is the most common (SP500, Nasdaq Comp/Nasdaq 100, Russell 1000/2000/3000; & from Wilshire, MSCI, FTSE, TSX, TOPIX, etc). It may use sampling or full replication; full market-cap or free-float; futures to manage cash flows; proceeds from securities-lending to reduce or eliminate (Fidelity ZERO funds) expense ratios (ERs); be uncapped or capped by stocks &/or sectors; change index & rebalance all at once (Russell indexes are notorious) or gradually (CRSP indexes); reinvest dividends daily or at month/quarter-end. So, index funds from different firms that follow the same index may perform differently for these reasons besides their different ERs. All indexes start at BASE values but then develop DIVISORS to ensure continuity when index components change, or splits occur. Another post will describe COMPLETION INDEXES.
Early indexes were PRICE-WEIGHTED indexes (DJIA, etc), or simple averages of prices. This was useful in the days before computers, but they still exist for marketing & business reasons; some copycats also exist (Nikkei 225). EQUAL-WEIGHT indexes are popular. Alternate weightings are also used. A broad approach is FACTORS-based or FUNDAMENTAL indexing. There were some industry frictions early on, mainly involving WisdomTree & Research Affiliates (RAFI indexes), on marketing issues. But it is accepted practice now to name factor(s) when only 1-2 factors are involved (size, value, growth, quality, minimum volatility, dividend (current or growth or blend), ESG, currency hedging, bond credit-quality, bond maturity/ duration, etc) & use the term fundamental indexing or multi-factor(s) indexing when 3 or more factors are involved.
Most fund firms license indexes from index specialist firms. But a recent trend is to use INTERNAL/ custom/ direct- indexing for limited use for individuals or groups but that may grow to replace some broad indexes. There are concerns about CONFLICTS of interest in that firms’ securities holdings may influence their internal indexing decisions, or the firms may trade ahead of making internal indexing decisions public (front-running).
TYPES of indexed funds include mutual funds/OEFs (growing rapidly); funds of index funds; target-date funds (TDFs; many are funds of indexed funds); CITs (collective/ commingled investment trusts); ETFs (most ETFs are still indexed). #PersonalFinance 10/17/21.