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Global ETF Center > Indexing Basics

Boom Securities - Indexing Basics

Why Index

Barclays Global Investors ("BGI") invented indexing with the creation of the first indexed strategy in 1971. Since then, indexing has become a popular investment technique among institutional investors in most developed markets.

For individual investors, however, indexing is a relatively new concept. While they may have heard of indexing, or read about it in the business press, individual investors may not always realize just how compelling the case for indexing is. Highlighted below are some of the reasons why indexed investment strategies have experienced remarkable growth in the past three decades:

Simplicity

Index funds are easy to understand and manage. With index funds, you can focus on the risk/return tradeoffs of different asset classes, instead of trying to second-guess the investing styles of different managers. You can make informed decisions and feel more comfortable about your choices.

Value

Index funds generally charge lower investment management fees. This is because index fund managers aren't spending time and resources researching and visiting individual companies. Also, index managers only trade stocks when there is a change in the index. This means that they have lower transaction costs than active managers, who may be trading frequently as markets move. All else being equal, lower fees translate into higher returns.

Diversification

Index funds are broadly diversified since they typically hold all securities in an index. This diversification helps reduce risk.

Distinct asset classes

A variety of studies have shown that trying to time the market or pick winners - either individual stocks or entire asset classes -- adds little to portfolio returns over the long term. Instead, history shows that asset mix is the key driver of total portfolio returns. Index funds can help you make better asset mix decisions because they provide the ability to invest in a distinct asset class. For example, when investors choose a Taiwan index fund traded on the Hong Kong Stock Exchange, they know exactly what they are investing in - Taiwanese stocks. But when they select an active Taiwan equity fund they may not know exactly what they're investing in. The active fund could have a bias to small cap stock, which are relatively illiquid, a tilt to or avoidance of certain sectors and/or a high allocation to cash -- all of which may confuse the asset mix decision.

Performance

A number of studies have shown that the typical active fund manager in most markets does not beat the index. Therefore, since index funds tend to have lower investment fees and transactions costs, index funds should outperform the average active manager after fees. Although index funds do not guarantee above average performance, they do offer competitive and consistent performance over the long term. It's this consistency of performance relative to the market, and the peace of mind that you won't be faced with unpleasant performance surprises, that make index funds attractive.

Ability to match potential and projected returns

Nowadays, many brokers, financial advisors, and financial web sites offer modeling tools to help you project retirement income needs and resources. These tools help you understand how current investment decisions will affect future retirement income. And they typically use index returns in their projections. These tools may be more useful if you are investing in index funds that allow you to achieve index returns consistently over time.

Increased foreign diversification

Many investors want to diversify their investments beyond their home country. However, very few investors know enough of individual stocks in foreign markets. Index funds that benchmarked against internationally recognized indices offer a relatively less risky and cost effective channel for overseas investing.

By Barclays Global Investors, the world's largest institutional fund manager and leading sponsor of exchange traded fund.


BOOM informs you as follows:

All information contained on this website (the "information") shall not constitute or be regarded as an offer or a solicitation of an offer to buy or sell the funds mentioned herein, and no offers or sales of these funds will be made in jurisdictions where such offers or sales are not authorized, qualified or exempt from regulation.

Investment involves risk and the offering documents of the funds should be read for further details. The price of unit shares and the income from them may go down as well as up and any past performance figures shown are not indicative of future performance.

Investors should note that the information may not have set out all the risks and other significant aspects involved in investing in the funds mentioned herein. Prospective investors should take steps to ensure that they fully understand the transaction and have made an independent assessment of the appropriateness of the transaction in the light of their own objectives and circumstances, including the possible risks and benefits of entering into such transaction. Investors should therefore read the relevant prospectus for details, including the product features and risk factors, and consider their own investment objective and risk tolerance level before investing. When in doubt, you should seek confirmation from your independent financial advisor whether the funds are suitable for you.

Those funds that target to provide investment results that closely correspond to the performance of the relevant underlying index, the performance of such fund may be highly correlated to the performance of the relevant underlying index. Do not invest in them unless you fully understand and are willing to assume the risks associated with them.

Those funds that invest in emerging markets or developing markets or single markets or sectors or smaller companies may involve a higher degree of risk, and may be more sensitive to price movements relative to the funds investing in developed markets or following a more diversified policy.

Those funds that involve derivatives and/or structured investment products may lead to material additional risks, including counterparty default risk or insolvency, and may expose the fund to significant losses.

Those funds that adopt a "Synthetic Replication" investment strategy, in particular, but not limited to, the synthetic ETFs (a marker X is placed at the beginign of the stock short names) listed on SEHK, may use financial deriivative instruments (such as swaps and performance-linked structured products issued by counterparties) to replicate the index performance. As a result, synthetic ETFs will be exposed to counterparty risk in that the counterparty may be unable to honour its commitments.

Listing on the stock exchange does not in and of itself guarantee that liquid market exists for ETFs. Besides, a higher liquidity risk is involved if an ETF uses financial derivative instruments, including structured notes and swaps, which are not actively traded in the secondary market and whose price transparency is not as easily accessible as physical securities. This may result in a bigger bid and offer spread. These financial derivative instruments are also susceptible to more price fluctuations and higher volatility. Hence, they can be more difficult and costly to unwind early, especially when the instruments provide access to a restricted market where liquidity is limited in the first place.

Those funds that invest in commodities may involve higher risks. The performance of commodities futures fund or commodities index fund may not correlate with the performance of the underlying commodities due to imbalances between expectation on futures contracts and the current price of commodities

Those funds or investors that base their investments in currencies other than the fund's denominated currency or those funds that invest in currencies are exposed to fluctuations of the exchange rate between their base currency and the fund's denominated currency.

In the worst-case scenario, the value of the funds may be worth substantially less than the original amount you invested (and in an extreme case, could be worth nothing).

Investment decision is based on your own judgment. You should NOT invest in the fund unless the intermediary who sells it to you has advised you that the fund is suitable for you and has explained why, including how it is consistent with your financial circumstances and your investment objectives.

The ETF's market price on the stock exchange may be different from its net asset value (NAV) per unit.

The content of this website is issued by Monex Boom Securities (H.K.) Ltd ("BOOM") and has not been reviewed by the Securities and Futures Commission ("SFC").

About Website Content

The Information is compiled by BOOM from individual fund management company's public information material. The information is provided solely for general information purposes and is not intended to replace expert advice. Use of the information is at your own risk. You must not rely upon the information without appropriate verification or further advice from your independent financial advisor.

Whilst all attempts have been made by BOOM to present the information accurately and completely, mistakes and omissions do sometimes occur. The information is subject to change without further notice. Upon the use of this website, you agree that BOOM is not responsible for any damages or losses arising from any use of the information.