The concept of an index fund is a tiny little piece of each and every thing that’s on the market.
This is not true. An index fund holds a particular index which generally does not represent “every thing that’s on the market”.
For a simple example, consider the most common index—the S&P 500. This index holds 500 largest-capitalization stocks in the US. If you invest in the S&P500 index you can be fairly described as investing into US large-cap stocks. The point is that you are NOT investing into small-cap stocks and neither you are investing in a large variety of other financial assets (e.g. bonds).
Yes. What I wrote was a summery, and not as perfectly detailed as one may wish. One can quibble about details: “the market”/”a market”, and those quibbles may be perfectly legitimate. Yes, one who buys S&P 500 indices is only buying shares in the large-cap market, not in all the many other things in the US (or world) economy. It would be silly to try to define a index fund as something that invests in every single thing on the face of the planet, and some indices are more diversified than others.
That said, the archetypal ideal of an index fund is that imaginary one piece of everything in the world. A fund is more “indexy” the more diversified it is. In other words, when one buys index funds, what one is buying is diversity. To a greater or lesser extent, of course, and one should buy not only the broadest index funds available, but of course also many different (non-overlapping?) index funds, if one wants to reap the full benifit of diversification.
the archetypal ideal of an index fund is that imaginary one piece of everything in the world.
Maybe in your mind. Not in mine. I think of indices (and index funds) as portfolios assembled under a particular set of rules. None of them tries to reach everything in the world, in fact a lot of them are designed to be quite narrow.
A fund is more “indexy” the more diversified it is.
I still disagree. An index fund’s most striking feature is that it invests passively, that is its managers generally don’t have to make any decisions, they just have to follow publicly announced rules. I don’t think a fund is more “indexy” if it owns more or more diverse assets.
In other words, when one buys index funds, what one is buying is diversity.
Sigh. Still no. You’re buying a portfolio composed under certain rules. Some of these portfolios (= index funds) are reasonably diversifed, some aren’t, and that depends on how do you think of diversification, too.
The “classic” index fund, one that invests into S&P500, is not diversified particularly well. It invests in only a single asset class in a single country.
An index fund’s most striking feature is that it invests passively, that is its managers generally don’t have to make any decisions, they just have to follow publicly announced rules. I don’t think a fund is more “indexy” if it owns more or more diverse assets.
Yup. Take an actively managed fund that seems to be indexy by ygert’s standards today. It might not be so indexy tomorrow.
This is not true. An index fund holds a particular index which generally does not represent “every thing that’s on the market”.
For a simple example, consider the most common index—the S&P 500. This index holds 500 largest-capitalization stocks in the US. If you invest in the S&P500 index you can be fairly described as investing into US large-cap stocks. The point is that you are NOT investing into small-cap stocks and neither you are investing in a large variety of other financial assets (e.g. bonds).
Yes. What I wrote was a summery, and not as perfectly detailed as one may wish. One can quibble about details: “the market”/”a market”, and those quibbles may be perfectly legitimate. Yes, one who buys S&P 500 indices is only buying shares in the large-cap market, not in all the many other things in the US (or world) economy. It would be silly to try to define a index fund as something that invests in every single thing on the face of the planet, and some indices are more diversified than others.
That said, the archetypal ideal of an index fund is that imaginary one piece of everything in the world. A fund is more “indexy” the more diversified it is. In other words, when one buys index funds, what one is buying is diversity. To a greater or lesser extent, of course, and one should buy not only the broadest index funds available, but of course also many different (non-overlapping?) index funds, if one wants to reap the full benifit of diversification.
Maybe in your mind. Not in mine. I think of indices (and index funds) as portfolios assembled under a particular set of rules. None of them tries to reach everything in the world, in fact a lot of them are designed to be quite narrow.
I still disagree. An index fund’s most striking feature is that it invests passively, that is its managers generally don’t have to make any decisions, they just have to follow publicly announced rules. I don’t think a fund is more “indexy” if it owns more or more diverse assets.
Sigh. Still no. You’re buying a portfolio composed under certain rules. Some of these portfolios (= index funds) are reasonably diversifed, some aren’t, and that depends on how do you think of diversification, too.
The “classic” index fund, one that invests into S&P500, is not diversified particularly well. It invests in only a single asset class in a single country.
Yup. Take an actively managed fund that seems to be indexy by ygert’s standards today. It might not be so indexy tomorrow.