ETF Investing: Make Sure You Know Your Index

Understanding your ETFs' underlying indices and choosing the appropriate one to achieve the desired investment objective is crucial

Morningstar Equity Analysts 19 April, 2012 | 11:04AM
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For exchange-traded fund investors, understanding products' underlying indices and choosing the appropriate one to achieve the desired investment objective is a crucial piece of the investment process. The following article will help investors better understand the different nuances of index construction by highlighting the various methodologies used to construct an index as well as their specific advantages and disadvantages.

Index Definition
Before delving into the index construction, let’s take a step back first and define an index.

An index is a statistical measure representing the aggregated market value of its constituents. Each index represents a particular market, e.g. STOXX Europe 600 Index, or a portion of it, e.g. STOXX Europe 600 Financial Services Index, and therefore serves as a barometer for this market or industry. Indices can use different calculation methods which we will discuss in more detail in the next section.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Morningstar Equity Analysts  Morningstar stock and fund analysts cover 2,000 mutual funds, 2,100 equities, and 300 exchange-traded funds.

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