Securities Selection
Indexing is the simple selection of securities for an investment strategy. Index fund is based upon the value of a particular stock market index. Broad indices have outperformed most of the equity and bond funds that are sold to public investors by far. We use index funds, or Exchange Trading Funds (ETF) for portfolio construction. The important point to remember about an open-end-based index fund is that all share creation and redemptions are done at the closing Net Asset Value (NAV) priced by the investment managers of the fund. While ETFs are created and redeemed during the trading hours of the stock exchange where they are listed. Investors seeking long-term successful returns would be better off to choose ETFs for their investment plan. Most investors do not believe that the stock market is actually better informed than they are. Likewise, financial professionals still do not accept such a premise; perhaps, this is due to their need to justify their fees. Some believe they can beat the market by picking stocks.
Nearly no stock market investor can consistently outperform the market either by predicting its movements or by stock picking. Even the legendary investor Warren Buffet has under performed the S&P 500 index in the recent bull market, and said “I would not want to bet my life on whether we beat the S&P 500 over the next 10 years” and added “In my view, for most people, the best thing to do is to own the S&P 500 index fund”. * Thus, we believe that investors will be much better off by investing in low cost, broad-based ETFs such as the FT All Shares Index, or the MSCI indices, which simply buy and hold the underlying stocks in the market and trade like a single stock. Further, broad-based stock market index funds have regularly outperformed more than two-thirds of the actively managed funds over the past 10 years.
Fixed income: bond index funds, or ETFs, similarly, offer great advantages for investors, for they buy and hold a series of maturities of diversified bond issues.
International: Indexing has also proved its merits in international investing. Index funds, and ETFs based on a MSCI series of international indices of regions, emerging markets, and individual countries’ stock and bond markets are listed on major stock exchanges, such as the London Stock Exchange. Such ETFs have also regularly outperformed international fund managers.
Summary: Let ’s summarize the advantages of index funds. First, they simplify investing. You don ’ t need to evaluate the thousands of actively managed funds and somehow pick the best. Second, index funds are cost efficient, for they buy and hold all constituents of the underlying index, and hence they have low turnover trading.
Note: Not all index funds are created equal. Some index funds charge high management fees. We believe you should buy only those index funds that charge at least less than 50% of annual management charges.
ETF: You may also want to consider exchange traded index funds, or ETFs. These are index funds that trade on the major stock exchanges and can be bought and sold like stocks. ETFs are available for broad U.S. and foreign indexes as well as for various market sectors.
They often have even lower expense ratios than index funds. They can be traded during the stock market trading hours.