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Global ETF Center > Index Investing Explained

Index-investing Explained!

What is Indexing?

Indexing is an investment strategy of "passive" management to match the average performance of a stock market index, a particular underlying market segment or group of stocks. Usually, "buying a market" or replicating an index accomplishes this.

Indexing offers lower risk with diversification as money is spread over the entire market. It also eliminates the risks, costs, and uncertainties of "active" management (stock picking and market timing). Remember, the major role of an index fund manager is not to pick stocks actively, but to ensure the fund's portfolio tracks the chosen index closely.

Index investing is perfect for novice investors who just want the benefits of stock ownership without either the hassle or the risks that are inherent in picking their own stocks.

Index-tracking Funds - The Limitations

The constraint of passive management would be in times of falling markets, as the portfolio cannot be adjusted freely and the fund manger cannot move into cash to protect the fund. Nor can the fund be expected to outperform the market during boom periods.

Another risk is tracking error. It occurs when the performance of the fund varies from that of the index, which it is supposed to replicate. It is because the portfolio may not perfectly replicate the index. Also, an index does not incur transaction costs, subscription charges and management fees, but a real portfolio does. Moreover, liquidity and low trading volumes of the market that the fund invests in can lead to returns that don't match that of the market.

An Alternative to Index-Tracking Funds

An alternative to index-tracking funds is Exchange Traded Funds (ETFs) that tracks an index. Unlike open-ended mutual funds, ETFs are traded, like individual stocks, on an exchange throughout the trading day. They do not levy subscription or redemption charges, but investors must pay brokerage fees and normal transaction levies to buy and sell ETF shares, as well as annual management fees. The Tracker Fund of Hong Kong is a typical example.

The trading value of the ETF is based on the net asset value of the underlying stock portfolio. Due to the low portfolio turnover and passive investment characteristic, ETF has an expense ratio lower than other actively managed funds. Visit Boom's Global ETF Center for more information!

This article is offered for educational purposes only. Monex Boom Securities (HK) does not recommend specific investment products. Make sure you fully understand any investment product before investing to determine whether it may meet your needs.


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.