Showing posts with label Funds Investing. Show all posts
Showing posts with label Funds Investing. Show all posts
24.4.12
Different Ways Index Funds Are Weighted
You invest in index funds, but do you know that different index funds are weighted in a different way? Whatever type of index fund or funds you choose, make sure you understand the methodology, so you can stay away from an investment that doesn't behave the way you expected.
Although index funds seem to track anything and everything, there are a few primary ways of constructing them, from conventional market-cap weighting to alternative methods such as equal, fundamental, or price weighting. (read full article "How Index Funds Are Weighted" on SmartInMoney.com)
Cap-Weighted Indexing
By far the most common method of indexing is through market-cap weighting, in which the amount of each stock held is proportionate to its market value, or capitalization. So if a stock's market cap makes up 6% of an index, it also makes up 6% of the fund's portfolio.
Equal-Weighted Indexing
All stocks are held in equal proportion regardless of market cap. So, for example, an equal-weighted S&P 500 fund would still include the same 500 stocks as the cap-weighted version, but in equal amounts--in this case each making up 0.2% of the index.
Fundamental Indexing
Stocks are weighted based on a fundamental metric or metrics, such as dividend yield, earnings, book value, or a combination of factors.
Price-Weighted Indexing
Stocks are weighted by the share price for each company in the index, with the Dow Jones Industrial Average the most famous example.
16.10.09
Index Investing: Track the Market with Passive Strategy
More and more institutional investors, especially pension funds, are applying index-investing strategy by shifting their assets from active managers to index funds.
SmartInMoney reported, there are four major attractions of indexing that motivate investors to track market performance, rather than try to outperform it.
1. They offer a remarkably simple, convenient way to create a diversified portfolio.
2. Index funds typically cost less to manage than actively managed funds.
3. Their performance track record has been impressive, even during bear markets.
4. Index funds are fully invested strategy that keeps investor staying in the game during market recover
Simple
Indexing is a very simple way of gaining exposure to an investment style or the broad market. Index funds can help investors to build a portfolio that's appropriately diversified to meet investors’ goals, time horizon, and tolerance for risk in a convenient way.
Low Cost
Index funds’ main advantage is lower cost than investors would get from an actively managed mutual fund. Index funds win in all three components of investment cost.
Index funds charge low expense ratio, which is the cost of managing the fund. An average non-index fund has an expense ratio of around 1.5%; whereas many index funds have an expense ratio somewhere between 0.15% to 0.5%. Index funds are not actively managed; they are managed largely using computer programs. There are no expensive analysts required to try to figure out what bets to take.
Index funds transaction costs are generally much lower. The costs are incurred as the portfolio manager is managing the portfolio. Indexing is a very low-turnover strategy, relatively low compared to active management. While active strategy involves relatively frequent buying and selling securities, index fund managers only need to maintain the appropriate weightings to match the index performance; the technique is known as passive management.
The third cost is associated with taxes, in the form of capital gains or taxes on dividends. Passive management generates realized capital gains from trading far less frequently than does active management. Consequently, more tax payments could be either deferred of avoided entirely.
What matters to investors are after-cost returns. A fund's return is the total return of the portfolio minus the fees an investor pays for the investment costs. If a fund charges 1.5%, then the portfolio manager have to outperform the fund’s benchmark by that amount just to be even. Anything less, and the fund's returns would lag its benchmark. Studies reveal main culprit for the failure of actively managed funds to beat the indexing is the high costs that they charge. The more you trade, the less you earn, because management fee, transaction costs, taxes and bad decisions always kill returns
Hard-to-Beat Performance
Historically, index funds have performed very competitively against actively managed funds, and frequently outperforming a majority of active funds whether it's a shorter time period, like a year, three years, five years, or extending out ten years.
Over the year 2008, which was a very difficult year in the marketplace, index funds still outperformed a majority of the actively managed portfolios. Over the same period of time, index fund performance was very competitive against the active investments in different segments within the marketplace. In the nine Morningstar "style boxes," such as large-cap value or large-cap growth, indexing outperformed active managers in three of those, according to Gus Sauter, Vanguard's chief investment officer. It underperformed in three, and matched the active managers in three.
Over longer time periods, index funds provided even more competitive performance because that's where the costs of active management get compounded over time. So investors tend to find that over a 10-year (or more) time horizons, most indexes have outperformed the active investments.
Recent studies provided more evidence that the failure of active management in beating their benchmark index is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, a new study found that it is very hard, if not impossible, to justify active management for most individual, taxable investors over a long term. (Detail findings of the studies are elaborated in the "Index Investing Supremacy")
Investing in an index fund doesn't guarantee that you'll never lose money. Index funds will decline in a bear market and up in a bull market, right along with the market. Investors should really think long-term because indexing is a great way to capture the long-term returns of the marketplace with its low-cost benefit. If investors get nervous during a downturn and sell, they’ll probably miss the recovery.
Fully Invested
Index investing can be a great way to capture the typically fast burst that a market experiences when it's making the shift from a bear market to a bull market. A fully invested strategy of index investing positions investors very well to benefit from the large rate of return during the market recovery. It's designed to perform right in line with the market as it goes up. In the last five or six bear markets, particularly the very steep bear markets, the market typically had a very large increase in the first 12 months coming out of a bear market (read "One year after the bear").
Market just witnessed that after months of the most recent cruel bear market, which bottomed in March, the stock markets closed the third quarter ending Sept. 30. 2009 with huge gain and the Dow Jones Industrial Average reclaimed the 10,000 mark on Oct. 14, 2009.
As a bear market turns into a bull market, active managers may suffer from a couple of problems as a bear market turns into a bull market. First, the active managers tend to hold the most cash near market bottoms. Because of the cash drag in an actively managed portfolio, it won't fully benefit in the rebound.
SmartInMoney reported, there are four major attractions of indexing that motivate investors to track market performance, rather than try to outperform it.
1. They offer a remarkably simple, convenient way to create a diversified portfolio.
2. Index funds typically cost less to manage than actively managed funds.
3. Their performance track record has been impressive, even during bear markets.
4. Index funds are fully invested strategy that keeps investor staying in the game during market recover
Simple
Indexing is a very simple way of gaining exposure to an investment style or the broad market. Index funds can help investors to build a portfolio that's appropriately diversified to meet investors’ goals, time horizon, and tolerance for risk in a convenient way.
Low Cost
Index funds’ main advantage is lower cost than investors would get from an actively managed mutual fund. Index funds win in all three components of investment cost.
Index funds charge low expense ratio, which is the cost of managing the fund. An average non-index fund has an expense ratio of around 1.5%; whereas many index funds have an expense ratio somewhere between 0.15% to 0.5%. Index funds are not actively managed; they are managed largely using computer programs. There are no expensive analysts required to try to figure out what bets to take.
Index funds transaction costs are generally much lower. The costs are incurred as the portfolio manager is managing the portfolio. Indexing is a very low-turnover strategy, relatively low compared to active management. While active strategy involves relatively frequent buying and selling securities, index fund managers only need to maintain the appropriate weightings to match the index performance; the technique is known as passive management.
The third cost is associated with taxes, in the form of capital gains or taxes on dividends. Passive management generates realized capital gains from trading far less frequently than does active management. Consequently, more tax payments could be either deferred of avoided entirely.
What matters to investors are after-cost returns. A fund's return is the total return of the portfolio minus the fees an investor pays for the investment costs. If a fund charges 1.5%, then the portfolio manager have to outperform the fund’s benchmark by that amount just to be even. Anything less, and the fund's returns would lag its benchmark. Studies reveal main culprit for the failure of actively managed funds to beat the indexing is the high costs that they charge. The more you trade, the less you earn, because management fee, transaction costs, taxes and bad decisions always kill returns
Hard-to-Beat Performance
Historically, index funds have performed very competitively against actively managed funds, and frequently outperforming a majority of active funds whether it's a shorter time period, like a year, three years, five years, or extending out ten years.
Over the year 2008, which was a very difficult year in the marketplace, index funds still outperformed a majority of the actively managed portfolios. Over the same period of time, index fund performance was very competitive against the active investments in different segments within the marketplace. In the nine Morningstar "style boxes," such as large-cap value or large-cap growth, indexing outperformed active managers in three of those, according to Gus Sauter, Vanguard's chief investment officer. It underperformed in three, and matched the active managers in three.
Over longer time periods, index funds provided even more competitive performance because that's where the costs of active management get compounded over time. So investors tend to find that over a 10-year (or more) time horizons, most indexes have outperformed the active investments.
Recent studies provided more evidence that the failure of active management in beating their benchmark index is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds. What's more, a new study found that it is very hard, if not impossible, to justify active management for most individual, taxable investors over a long term. (Detail findings of the studies are elaborated in the "Index Investing Supremacy")
Investing in an index fund doesn't guarantee that you'll never lose money. Index funds will decline in a bear market and up in a bull market, right along with the market. Investors should really think long-term because indexing is a great way to capture the long-term returns of the marketplace with its low-cost benefit. If investors get nervous during a downturn and sell, they’ll probably miss the recovery.
Fully Invested
Index investing can be a great way to capture the typically fast burst that a market experiences when it's making the shift from a bear market to a bull market. A fully invested strategy of index investing positions investors very well to benefit from the large rate of return during the market recovery. It's designed to perform right in line with the market as it goes up. In the last five or six bear markets, particularly the very steep bear markets, the market typically had a very large increase in the first 12 months coming out of a bear market (read "One year after the bear").
Market just witnessed that after months of the most recent cruel bear market, which bottomed in March, the stock markets closed the third quarter ending Sept. 30. 2009 with huge gain and the Dow Jones Industrial Average reclaimed the 10,000 mark on Oct. 14, 2009.
As a bear market turns into a bull market, active managers may suffer from a couple of problems as a bear market turns into a bull market. First, the active managers tend to hold the most cash near market bottoms. Because of the cash drag in an actively managed portfolio, it won't fully benefit in the rebound.
13.10.09
Three providers control ETF market
Among 95 ETF providers, the trio of iShare, State Street Global Adviser (SSgA) and Vanguard control more than 71% of the worldwide asset under management and 85% of the U.S. assets at the end of August 2009, reports SmartInMoney.
As a the largest ETF provider in terms of both number of products and asset, iShare alone controls 48.2% global market and 52.9% U.S. market with $429.32 billion asset under management from 391 ETFs. SSgA is second with 15.6% market share followed by Vanguard with 15.6% market share.
SPDR (SPY) leads the ETF markets with $73.3 billion asset under management as of the end of August 2009. SPDR from the State Street Global Adviser tracks S&P 500 index, an index of 500 largest businesses in the U.S.
At the second place is iShares MSCI EAFE Index (EFA) that track MSCI EAFE index, an equity benchmark for its international stock performance, with $33.5 billion net assets. Tracking performance of the MSCI Emerging Markets index, iShares MSCI Emerging Markets Index (EEM) trails closely at the third with 30.7 billion net assets. These three U.S. ETFs top the ranks in both U.S. and global markets.
This rank is not surprising as investors commonly use these three ETFs as vehicles to diversify their equity investment. Adding equity exposure of both developed nations outside of North America and emerging countries to equity of largest U.S. companies provides investor with a broad diversification covering global equities. This ability to offer exposure to such a wide variety markets and sectors with relative ease and cheap is EFTs’ main strength that is not offered by other investment vehicles. As a result, ETFs continue to enjoy considerable momentum.
As a the largest ETF provider in terms of both number of products and asset, iShare alone controls 48.2% global market and 52.9% U.S. market with $429.32 billion asset under management from 391 ETFs. SSgA is second with 15.6% market share followed by Vanguard with 15.6% market share.
SPDR (SPY) leads the ETF markets with $73.3 billion asset under management as of the end of August 2009. SPDR from the State Street Global Adviser tracks S&P 500 index, an index of 500 largest businesses in the U.S.
At the second place is iShares MSCI EAFE Index (EFA) that track MSCI EAFE index, an equity benchmark for its international stock performance, with $33.5 billion net assets. Tracking performance of the MSCI Emerging Markets index, iShares MSCI Emerging Markets Index (EEM) trails closely at the third with 30.7 billion net assets. These three U.S. ETFs top the ranks in both U.S. and global markets.
This rank is not surprising as investors commonly use these three ETFs as vehicles to diversify their equity investment. Adding equity exposure of both developed nations outside of North America and emerging countries to equity of largest U.S. companies provides investor with a broad diversification covering global equities. This ability to offer exposure to such a wide variety markets and sectors with relative ease and cheap is EFTs’ main strength that is not offered by other investment vehicles. As a result, ETFs continue to enjoy considerable momentum.
11.10.09
ETF assets hit an all time high
The ETF benefits have attracted many institutional investors and retail investors since the first launch in U.S. in 1993. U.S. ETFs enjoyed $47.4 billion inflow in the first seven months of 2009 while regular mutual funds suffered an outflow of $50.6 billion, reports SmartInMoney.
During the first seven month of 2009 global net sales of ETFs was $65.7 billion, which was still lower than the net sales of mutual funds of $97.5 billion, according to Strategic Insight.
A worldwide trend has seen global ETF assets hit an all time high of $891 billion at the end of August 2009 according to the September 2009 edition report from Barclays Global Investors (BGI). The new high of global ETF assets is 3.9% above the previous all time high of $858 billion set in July 2009. Year-to-date assets have risen by 25.3% which is more than the 18.0% rise in the MSCI World Index in US dollar terms. The universal ETF industry had 1,773 ETFs with 3,137 listings from 95 providers on 41 exchanges at the end of August 2009.
The U.S. ETF assets also hit an all time high of $607 billion at the end of August 2009, a 4.3% increase from the previous all time high of $582 billion set in July 2009. Meanwhile, the U.S. ETF industry had 710 ETFs, from 22 providers on 3 exchanges.
During the first seven month of 2009 global net sales of ETFs was $65.7 billion, which was still lower than the net sales of mutual funds of $97.5 billion, according to Strategic Insight.
A worldwide trend has seen global ETF assets hit an all time high of $891 billion at the end of August 2009 according to the September 2009 edition report from Barclays Global Investors (BGI). The new high of global ETF assets is 3.9% above the previous all time high of $858 billion set in July 2009. Year-to-date assets have risen by 25.3% which is more than the 18.0% rise in the MSCI World Index in US dollar terms. The universal ETF industry had 1,773 ETFs with 3,137 listings from 95 providers on 41 exchanges at the end of August 2009.
The U.S. ETF assets also hit an all time high of $607 billion at the end of August 2009, a 4.3% increase from the previous all time high of $582 billion set in July 2009. Meanwhile, the U.S. ETF industry had 710 ETFs, from 22 providers on 3 exchanges.
9.8.09
ETFs keep flourishing
SmartInMoney.com wrote in the article "ETF Structure and Advantage" that Exchange-traded funds (ETFs) keep flourishing as they recorded their largest month on record in July with US$646-billion in assets, according to Birinyi Associates
Exchange traded funds in their basic form are baskets of securities that are traded, like individual stocks, on an exchange. Funds can track any number of indexes from the large-cap S&P 500, small-cap Russell 2000, or even commodities. Most of ETFs on the market currently are passively managed, tracking a wide variety of broad to narrow market indexes.
As of July, SPDR (SPY) remains the largest ETF at US$69-billion. SPDR Trust is an exchange-traded fund that holds all of the S&P 500 Index stocks
Exchange traded funds have grown rapidly to cover most broad investment purchases and many niche markets. Funds that drill down into specific sectors, industries, regions, countries, and asset classes make up a great percentage of the ETF universe, offering relatively inexpensive access to investments such as currencies, precious metals, or emergent industries that thus far have been the sole province of larger institutional and wealthy investors.
Recently, fund companies have also launched actively managed ETFs. These funds are not tied to a benchmark, but continue to sport the familiar benefits of ETFs.
ETFs attract both investors and traders who do not wish to make individual stock selections but only capture the broad movement of the market. ETFs appeal to different types of do-it-yourself investors. Investors who prefer index funds over actively managed offerings find ETFs appealing because many of them are very cheap. Some day-traders like ETFs because of their stock-like qualities and their focus on individual sectors or markets.
Read full article at smartinmoney.com
Exchange traded funds in their basic form are baskets of securities that are traded, like individual stocks, on an exchange. Funds can track any number of indexes from the large-cap S&P 500, small-cap Russell 2000, or even commodities. Most of ETFs on the market currently are passively managed, tracking a wide variety of broad to narrow market indexes.
As of July, SPDR (SPY) remains the largest ETF at US$69-billion. SPDR Trust is an exchange-traded fund that holds all of the S&P 500 Index stocks
Exchange traded funds have grown rapidly to cover most broad investment purchases and many niche markets. Funds that drill down into specific sectors, industries, regions, countries, and asset classes make up a great percentage of the ETF universe, offering relatively inexpensive access to investments such as currencies, precious metals, or emergent industries that thus far have been the sole province of larger institutional and wealthy investors.
Recently, fund companies have also launched actively managed ETFs. These funds are not tied to a benchmark, but continue to sport the familiar benefits of ETFs.
ETFs attract both investors and traders who do not wish to make individual stock selections but only capture the broad movement of the market. ETFs appeal to different types of do-it-yourself investors. Investors who prefer index funds over actively managed offerings find ETFs appealing because many of them are very cheap. Some day-traders like ETFs because of their stock-like qualities and their focus on individual sectors or markets.
Read full article at smartinmoney.com
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