Market indexes as proxy for systematic risk
Last but not the least, the concept of systematic risk has also contributed to the use of market indicator series. Also known as market risk, it stems from factors that systematically affect most firms, such as high interest rates, inflation, recessions, and war. Since most stocks are negatively affected by these factors, market risk cannot be eliminated by diversification. Hence, it is also known as undiversifiable risk. Since this risk is inherent in the market, it can be measured by the...
Fair pricing and liquidity
ETF pricing and liquidity stem from three main sources the creation and redemption process the trading of shares on the secondary market and transparency. ETFs do not have a fixed number of shares.2 Authorized participants or market makers can issue and redeem shares of the ETF fund at any time, in large blocks of the fund's shares, called creation units or a standard basket, these replicate the underlying index. Authorized participants are those broker dealers, institutional investors, or...
The case for bond indexing
A strong case can be made for indexed bond investments. Several of the factors that explain the phenomenal growth of equity indexing equally justify the popularity of bond indexing. First and foremost, bonds are also an integral part of modern portfolio theory. As a widely recognized asset class, they occupy an important position in any portfolio that claims to be strategically balanced regardless of whether this portfolio is actively or passively managed. As with equity portfolios, the issue...
Indexing and ETFs
ETFs are an outgrowth of index funds. Like with index funds, investors can take a position in the market without selecting individual securities. ETFs represent a basket of securities based on a particular index. Purchases or redemptions of an index fund, however, only occur at the end of the day when the fund's net asset value is calculated. ETFs overcome this limitation since they trade continuously on the major stock exchanges like ordinary stocks. Hence ETFs offer investors the benefits of...