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Agreed. These indices are extremely useful for trading. For just under $275, just about anyone can buy a share of SPY and make/lose money based on trends acros

Agreed. These indices are extremely useful for trading. For just under $275, just about anyone can buy a share of SPY and make/lose money based on trends across a diverse array of the largest companies in the world. Without indices, you'd have to spend tens or hundreds of thousands of dollars for this kind of diversification. It's also useful for tracking trends within specific sectors. Think tech is undervalued? Invest in a NASDAQ ETF like QQQ or NDX. Maybe you read that OPEC is planning to increase oil production and you think that's going to devalue existing oil supplies, so you take a short position on XLE (an energy index ETF). The relative simplicity of indices means there's a lot of volume and liquidity. It's not easy to find a buyer for shares in an obscure oil company, but lots of investors would be happy to buy your energy index ETF shares. I love indices. I'd be hesitant to invest in sectors I don't know much about, like construction materials. They're heavily affected by the price of raw materials, and lately all this tariff talk has caused a lot of volatility in those prices. Which individual companies should I get involved with? It's hard to say without a fair bit of research because it's a specialized field. With an index ETF, I can quickly take a long or short position to get a little exposure to the sector without having to dig too deep.

abakker 8y ago
Just a quick point of correction - be careful not to confuse an Index with an Index fund. You are talking about ETFs, which come in Index fund varieties, but the Index exists as a market indicator, not for the purpose of creating a fund. ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.
- actsasbuffoon 8y ago
  Yes, you're correct. I didn't do a good job explaining the difference. I considered editing to add a note, but I think your comment explains it clearly enough to make that unnecessary.
- tanderson92 8y ago
  > ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes. It's rumored that Vanguard 'bribed' CRSP to create its Total Market index (and etc for other funds) so that its licensing fees to MSCI / Dow Jones would be lower. So while it is true they do not maintain the indices, it is possible they have a heavy role in creating the indices.
  - abakker 8y ago
    Yeah, I considered adding that Index funds "mostly" don't create indexes, but I'm sure that some do. And some ETFs have been created that almost track certain indexes. You see special ones that are mostly S&P500 without tobacco or without guns or some other ethical choice.
arawde 8y ago
On a related note, there are a _lot_ of indices. FT reports that there are over 3 million stock indices, for ~50k public stocks [0]. You can make an index with basically anything in it. There are indices for emerging markets, for the Gulf region, for companies in Mexico, for companies which qualify as ESG (environmental, social, and governance) criteria. There are indices of stocks that historically perform well in periods of rising interest rates, and there are indices for the Eurozone. The ETFs just build on top of the index. In almost every prospectus, there is some kind of note about which index it is. You can go look at how the index is arranged, and there are sometimes multiple funds that track indices in the same sectors, with different weights. If you're not happy with the amount of Berkshire in your financials ETF, you can go find a fund which uses a different index and buy that instead. If anything, a stock market index is _more_ valuable in a digital world, because it effectively adds a layer of abstraction to the typical notion of investing. [0] https://www.ft.com/content/9ad80998-fed5-11e7-9650-9c0ad2d7c5b5 https://www.ft.com/content/9ad80998-fed5-11e7-9650-9c0ad2d7c...
- skgoa 8y ago
  Also, while buying & holding an ETF based on the S%P 500 is the canonical low-effort investing advise, it is trivially easy to beat this strategy by choosing an index that performs better historically. E.g. the Russel 2000 or some other index that captures the price movements of medium sized companies. The S&P 500 tracks the biggest companies, which necessarily are the ones that have done most of their growing already.
  - tanderson92 8y ago
    > it is trivially easy to beat this strategy by choosing an index that performs better historically. Past performance is no guarantee... This is a very subtle question which is far from resolved[1] in the academic literature; it is nowhere close to the slam-dunk you state it is. [1]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122326 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122326

abakker 8y ago

Just a quick point of correction - be careful not to confuse an Index with an Index fund. You are talking about ETFs, which come in Index fund varieties, but the Index exists as a market indicator, not for the purpose of creating a fund. ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.

actsasbuffoon 8y ago
Yes, you're correct. I didn't do a good job explaining the difference. I considered editing to add a note, but I think your comment explains it clearly enough to make that unnecessary.
tanderson92 8y ago
> ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes. It's rumored that Vanguard 'bribed' CRSP to create its Total Market index (and etc for other funds) so that its licensing fees to MSCI / Dow Jones would be lower. So while it is true they do not maintain the indices, it is possible they have a heavy role in creating the indices.
- abakker 8y ago
  Yeah, I considered adding that Index funds "mostly" don't create indexes, but I'm sure that some do. And some ETFs have been created that almost track certain indexes. You see special ones that are mostly S&P500 without tobacco or without guns or some other ethical choice.

arawde 8y ago

On a related note, there are a _lot_ of indices. FT reports that there are over 3 million stock indices, for ~50k public stocks [0]. You can make an index with basically anything in it. There are indices for emerging markets, for the Gulf region, for companies in Mexico, for companies which qualify as ESG (environmental, social, and governance) criteria. There are indices of stocks that historically perform well in periods of rising interest rates, and there are indices for the Eurozone. The ETFs just build on top of the index. In almost every prospectus, there is some kind of note about which index it is. You can go look at how the index is arranged, and there are sometimes multiple funds that track indices in the same sectors, with different weights. If you're not happy with the amount of Berkshire in your financials ETF, you can go find a fund which uses a different index and buy that instead. If anything, a stock market index is _more_ valuable in a digital world, because it effectively adds a layer of abstraction to the typical notion of investing. [0] https://www.ft.com/content/9ad80998-fed5-11e7-9650-9c0ad2d7c5b5 https://www.ft.com/content/9ad80998-fed5-11e7-9650-9c0ad2d7c...

skgoa 8y ago
Also, while buying & holding an ETF based on the S%P 500 is the canonical low-effort investing advise, it is trivially easy to beat this strategy by choosing an index that performs better historically. E.g. the Russel 2000 or some other index that captures the price movements of medium sized companies. The S&P 500 tracks the biggest companies, which necessarily are the ones that have done most of their growing already.
- tanderson92 8y ago
  > it is trivially easy to beat this strategy by choosing an index that performs better historically. Past performance is no guarantee... This is a very subtle question which is far from resolved[1] in the academic literature; it is nowhere close to the slam-dunk you state it is. [1]: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122326 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3122326