Exchange Index Fund (
So, stock indexes are special indicators of market status. As a rule, they are calculated at the price of ten-minded or hundreds of companies of the highest capitalization grouped according to a certain principle. For example, there are indexes consisting of shares of IT companies or metallurgical enterprises. And there are indexes representing a certain country: the top companies formed from USA, Japan or Russia.
Develop and calculate indexes rating agencies, agency financial information (for example,
Previously, the indexes were considered manually — now everything happens in real time automatically. This means that during the trading day, when the value of the shares included in the index is changing, its value changes.
Indices are needed primarily to investors. They help real-time determine, the market is growing or falling, make assumptions how it will move in the future. Based on these data, investors understand what country or industry to market, they would like to invest.
The index ETF is a fund, which clearly copes the structure of a single index (it is called an index-benchmark for a particular ETF), that is, investing in the paper that includes this index.
To the ETF clearly followed the basic index, the replication mechanism is used. There are two main options for the index ETF operating with securities. It can invest in 100% of the shares included in the base index — then this is a complete replication. And may be based on the principle of sections (optimization): not into all papers, but in a representative sample, which is reproducing the main characteristics and indicators of the base index.
When the index grows, the cost of ETF increases in proportion. When the index drops, the cost decreases. That is, the dynamics of the cost ETF reflects the state of the market, for the index of which the foundation follows.
How exactly is this «followation»? When a set of companies or the weight of individual shares in the index are changing, the management company immediately changes the structure of the ETF Foundation (buys and sells the necessary assets) — so that it accurately reflect the structure of the index. The company controlling the company changes the Fund’s filling depending on how the structure of the index changes. This scrupulous work is extremely important for efficacy, therefore it is automated in ETF and put on reliable IT platforms. But if the index does not change, the management company should not «adjust» the fund for new prices — and that is why.
Shares of companies are included in the basic indices in different proportions («have a different weight»). As a rule, the weight of each action is proportional to the capitalization (size) of the company. Such indexes are called «indexes weighted on capitalization.» The higher the value of the company’s shares on the stock exchange, the more its share in the index. The proportions are calculated by applying a special formula: divide the capitalization of a particular action to the capitalization of all other securities in the index.
If the management company is not able to provide such following (if the deviation of ETF from the index is more than 0.1%), follows the trial with the administrator, and then with the regulator.
The main advantage is diversification. Since the index includes shares of dozens and hundreds of companies, the fall in the cost of one of them minimally affects the entire index.
The index structure provides ETF maximum transparency: you know exactly what your money is invested due to the fact that the information about the composition of the base index is publicly available and is constantly updated. In addition, since index funds are usually more effective than active, thanks to the choice of ETF, your result will most likely be better than «achievements» of the average investor.
The third important advantage of ETF is access to the creation of the stock market for a small amount. One share of the ETF Fund, which includes the paper of the largest American companies, is worth
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