I am not in the US.
Index funds are very new in my country & the index fund market isn't
very mature & there isn't so much data about index funds here.
- There may be different indexes for a particular stock market, so
how would one arrive at what is the index best suited for an index fund.
- How many different companies should an index contain for making an index
fund based on that index to be a good investment vehicle.
I think in the US, an S & P 500 Index is the considered to be a good index
for an index fund to track (correct me if I am wrong here).
I assume that the S&P500 contains 500 stocks with different weightages.
How is the 500 number arrived at - i.e. what makes an index comprised of
500 stocks better than 250 or 600? What are the total number of stocks
in the US Stock market - is the 500 number some rough percentage of the
number of stocks (i.e say 10% or 25% or whatever)
- Does the S & P 500 contain only large caps or does it contain
I am totally not looking at specific indexes like Small Cap Index or
Medium Cap Index
or any sectoral index.
So my question boils down to this.
- In my country, there are a few indices - the number of stocks contained
index are quite different - i.e. one of the indices contains 10 times as
as one of the others.
So how do I select an index whose index fund I wish to invest in?
I do know what expense ratio is an important parameter for selection of
index funds, but let's assume that I can get an equivalent low expense
fund irrespective of which index I chose.
The more companies represented, the better approximation to market
At least twenty companies need to be in an index to smooth out market
Yes, the S&P 500 index covers most of value of the stock market.
The share of the market represented makes an index better. The stocks
are weighted based on their market cap.
There are at least 5,000 public corporations that one can buy stock
Do you want the index to cover the entire market? If so, then get one
like the Wilshire 5,000.
An index with a small number of stocks will have lower expenses.
On Wed, 4 Aug 2010 11:05:08 -0500, Ron Peterson
Vanguard's SP500 Index and Total Stock Market Index (all stocks that
trade regularly on NYSE and Nasdaq) have the same expense ratio of
..18%. Both can be lower for large accounts.
By the way, here's the Morningstar style box for VFINX, an venerable S&P 500
V B G
29 30 29 L
05 04 04 M
00 00 00 S
You can find out the style for a fund using their tools.
Are you talking about the US market, or your country's market?
On Thu, 05 Aug 2010 02:05:05 +0530, Default User
Talking about my countries market - what I mean is I am not looking
at specialized indexes, but general ones.
Anyway, the total number of stocks listed on our exchange would be about
5000 - I would think that a good %age of these are actively traded.
The main index which tracks the exchange has around 50 stocks. Though
the number of stocks is small, it covers stocks which have 60% of the
total market capitalization. There are a lot of fund houses which
offer index funds based on this index.
There are few more indices
- There is a 2nd index called a junior index, which covers the 50 next most
important stocks after the first 50. Only one fund house offers a fund
on this - their expense ratio is high without being very high. It's about
twice the expense ratio of what I can get for the first 50 index fund.
- there is another index which covers 500 stocks & around 90% of the market
capitalization. However, only one fund house has an index fund based on
index & their expense ratio is remarkably high. Their expense ratio is
the expense ratio of the top 50 index fund.
Overall, as I said the index fund markets are very nascent in my country.
Expense ratios are far lower than those of managed funds, but not low
For eg, the cheapest top 50 fund I can get has an expense ratio of 0.50%.
The Junior 50 fund has a 1% expense ratio. And the 500 fund has 1.5%.
I feel that 50 stocks is too small for an index though it covers 60% of
I am leaning towards buying two funds in equal amounts the top 50 & the
50, so averaging I would have an expense ratio of about 0.75% & though it
cover only 100 stocks, it would represent around 70% of the market
Does this look reasonable?
On Wed, 04 Aug 2010 21:35:08 +0530, Ron Peterson
Is there any particular reason to go for a Wilshire 5000 fund over the
the S&P500 fund?
Though the Wilshire 5000 represents 10 times as many stocks as the S & P
500, I would imagine that in terms of market capitalization, the difference
would be much smaller.
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I am in India. The index fund market is not very popular here & none
of the fund companies pay too much attention to it.
These are the index funds available here
Many of these index funds have big expense ratios.
Many of these have huge tracking errors.
I am mainly looking a 2 index funds which seem to be the best.
(they have lower expense ratios than other funds & they have far
lesser tracking errors than other index funds).
Nifty Benchmark Index fund which has an expense ratio of 0.50% & tracks
the Nifty Index. It's an Exchange Traded fund.
About this index -
Nifty Junior Benchmark Index fund which has an expense ratio of 1.0% &
the Nifty Junior Index. It's also an exchange Traded fund.
About this index -
I am planning to buy 50% of each of these funds, so that I will
an index of 100 stocks.
My main question is whether an index comprised of 100 stocks is a good
in terms of safety & returns.
I would have preferred tracking the CNX 500 index, but the expense ratio
fund is much higher - 1.5%.
Vanguard was planning to enter the Indian fund market for Indian
they have shelved their plans for now.
A change in government policies might lower the return to the S&P 500
The difference between the two indices is slight and a S&P 500 index
fund is likely to have lower management fees.
Over the past 5 years the Wilshire 5000 dropped 4.6% in value and the
S&P 500 dropped 8.5% in value.
Ron Peterson writes:
In slightly more precise language, the closer the index fund comes to
owning every stock in the same proportion as the index which the fund
tries to track, the more likely that the performance of the fund will
track the performance of the index. (ignoring the expenses the fund
incurs, which can be substantial or can be cheap).
That said, if you are interested in an index which has 7000 stocks,
you are a lot less likely to find an index fund which buys each and
every one of those 7000 stocks, and if you did find such a fund, the
costs of managing that many positions and trading back and forth may
overwhelm the tracking benefits of having every stock involved. Most
such index funds therefore use some form of "sampling" - buying enough
of the securities in the given index that the fund will track the index
as close as they can do for a reasonable cost.
Moreover, note that certain indices will be nearly impossible to
replicate precisely, and certain indices will also contain highly
illiquid issues which make it only reasonable for the funds to try to
track them with other things which behave similarly. (In particular,
for the latter case, consider trying to build a bond index fund and note
that the universe of bonds is vast and not all of them trade all the
It's not clear that tracking any particular index, no matter how well
one does it, makes for a "good investment vehicle". That said, while it
would be hard to come up with a fund which tracks the Barclays (er,
Lehman) Aggregate with only 20 securities, it's possible to track many
other indices *somewhat* with that few. Nevertheless, 20 securities is
a very small number for a fund which is mainly intended to provide vast
and cheap diversification.
The S&P 500 covers something on the order of 70% of the US stock market
and leaves out all the micro-caps, small-caps, many mid-caps, etc.
It may be a good index for the US Large cap market, but whether that's
the market or index you want to track is a different question.
The S&P 500 is a market-capitalization weighted index of 500 of the
largest US companies. That's how the index is defined. Whoever creates
an index may define it however he likes - including the rules which say
which companies or securities comprise the universe from which the index
is selected, the rules for the security selection and the weights.
There is no simple "better" or "worse". There's "better for some
particular purpose" or "worse with respect to that purpose". The S&P
500 is not a great index for tracking the whole US stock market. The
Wilshire 5000 or MSCI US Broad Market Index (the index tracked by the
Vanguard total stock market index fund) are much better proxies for the
entire US stock market. Which still doesn't answer the question of
whether or not you even want to try to track the US stock market itself.
Precisely. Or, since the OP is apparently not in the US, perhaps
there's a broad index covering his country's market? Or a way to buy a
global index and perhaps hedge it to his country's currency.
There are many many indices, some vastly broad (such as the Vanguard
Total World Stock Index which tracks the FTSE All-World Index and covers
47 developed and emerging markets, has broad sector exposure and more
than 2000 stocks) and some absurdly narrow (some index funds track only
a sub-sector of a market). Are you trying to make sector bets or are
you trying to get vast diversification?
The number of stocks in the index may play a part in the calculus of
expenses, but so, too, will the structure of the fund, the size of the
fund, the management's take, marketing expenses, etc. etc.
On Sat, 07 Aug 2010 02:52:40 +0530, Ron Peterson
You are looking at Index funds which are available in the US to invest in
India. I am looking at Index funds which are available in India to invest
in India. None of ones discussed in the article are available locally here.