Index funds


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 listed in the US Stock market - is the 500 number some rough percentage of the total number of stocks (i.e say 10% or 25% or whatever)
- Does the S & P 500 contain only large caps or does it contain medium/small caps also?
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 in the index are quite different - i.e. one of the indices contains 10 times as many stock 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 ratio fund irrespective of which index I chose.
Reply to
RJ

The more companies represented, the better approximation to market performance.
At least twenty companies need to be in an index to smooth out market fluctuations.
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 in.
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.
-- Ron
Reply to
Ron Peterson

On Wed, 4 Aug 2010 11:05:08 -0500, Ron Peterson wrote:
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.
Reply to
HW \"Skip\" Weldon

By the way, here's the Morningstar style box for VFINX, an venerable S&P 500 fund 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?
Brian
Reply to
Default User

On Thu, 05 Aug 2010 02:05:05 +0530, Default User wrote:
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 based 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 this index & their expense ratio is remarkably high. Their expense ratio is thrice 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 enough.
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 the market.
I am leaning towards buying two funds in equal amounts the top 50 & the next 50, so averaging I would have an expense ratio of about 0.75% & though it would cover only 100 stocks, it would represent around 70% of the market capitalization. Does this look reasonable?
On Wed, 04 Aug 2010 21:35:08 +0530, Ron Peterson wrote:
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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Reply to
RJ

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
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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 -
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and
Nifty Junior Benchmark Index fund which has an expense ratio of 1.0% & tracks the Nifty Junior Index. It's also an exchange Traded fund. About this index -
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I am planning to buy 50% of each of these funds, so that I will effectively have an index of 100 stocks.
My main question is whether an index comprised of 100 stocks is a good enough vehicle in terms of safety & returns.
I would have preferred tracking the CNX 500 index, but the expense ratio of the fund is much higher - 1.5%.
Vanguard was planning to enter the Indian fund market for Indian investors, but they have shelved their plans for now.
Reply to
RJ

A change in government policies might lower the return to the S&P 500 fund.
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
Reply to
Ron Peterson

Looking at
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, I would choose PIN because it draws stocks from both exchanges and EPI because it uses a different allocation than market value and has a larger portfolio of stocks.
Reply to
Ron Peterson

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 time).
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.
Reply to
BreadWithSpam

On Sat, 07 Aug 2010 02:52:40 +0530, Ron Peterson wrote:
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.
Reply to
Floyd

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