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Strategies & Capabilities
Index Investing
(1) Market Index
(2) Index Investing & Index Fund
(3) Features of an index fund
(4) Choosing an Index Fund Manager
Q&A: Index Investing
What is an Index Fund?
An index fund tracks the performance of a specific market benchmark (or index) as closely as possible.
What are the benefits of index funds?
Benefits of investing in index funds includes:
- Diversified investment: An index fund provides investors a cost-efficient approach to diversified exposure to equity or fixed income market.
- Relatively low cost: An index fund generally costs less to operate compared to an actively managed fund, and it incurs lower management costs.
- Performance transparency: An index fund is designed to approximately replicate the performance (before fees) of the relevant index. Investors have the information needed to make informed investments – holdings are disclosed so investors understand their investments.
How do index funds track the performance of an index?
There are two primary methods by which index funds seek to replicate the performance of a particular index: Index replication and Index optimization.
What is an index replication?
Index replication is an index strategy that seeks to hold all or nearly all securities of a particular index, with its weightings closely resembling those in the relevant index and its portfolio bearing a near mirror-image of the relevant index.
The index replication strategy typically applies to reasonably-sized portfolios with minimal liquidity or accessibility constraints, i.e. US large cap or developed international markets.
What is an index optimization?
Index optimization is an index strategy that seeks to build a representative portfolio that matches the risk and return characteristics of the relevant index.
The optimization strategy is applied typically to indexes that contain an exceeding amount of securities, enabling a more efficient purchase of securities in the index that may otherwise be hardly accessible in open markets. Consequently, an index fund adopting this strategy commonly holds only a subset of securities included in the relevant index.
What are the latest trends in index investing?
There is evidence that better gender diversity leads to improved performance. According to a 2015 MSCI1 study that explored global trends in gender diversity on corporate between December 2009 and August 2015, companies with at least three female board members, or companies with a higher percentage of women on the board than its country’s average, performed better as measured by return on equity (10.1% per year versus 7.4% for all other companies). 2
Gender diversity indexes, which are composed from companies that meet such diversity criteria, are a recent innovation.
1 The methodology used in MSCI’s study is different than that of the Index, and as such, the results of the study should not be viewed as indicative of the future performance of the Index. This information should not be considered a recommendation to buy or sell any security shown. It is not know whether the securities shown will be profitable in the future.
2 Past performance is not a reliable indicator of future performance. It is not possible to invest directly in an index. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Past performance is not a guarantee of future results. Investing involves risk including the risk of loss of principal. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. The offering document should be read for further details including the risk factors. All material has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Past performance is not a reliable indicator of future performance. It is not possible to invest directly in an index. Index returns reflect capital gains and losses, income, and the reinvestment of dividends. Index returns are unmanaged and do not reflect the deduction of any fees or expenses. The investment returns are denominated in share class dealing currency, which may be a foreign currency. If so, US/HK dollar-based investors are therefore exposed to fluctuations in the US/HK dollar/foreign currency exchange rate.
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