Over the last ten years, the number of ‘index’ products has ballooned. An index, an artificially constructed conglomeration of shares that can be used as a benchmark for investing.
ETF’s (Exchange Traded Fund) are a financial solution which invest peoples funds in a way that replicates indexes, there are currently 5,300 of these funds worldwide.
A global survey by the Index Industry Association (IIA) counted 3,288,000 investment indices across its 14 members, who collectively manager about 98 per cent of the worlds financial markets.
If the index population was a country, it would put the population somewhere between Mongolia and Puerto Rico.
The implications of the proliferation of indices is that any fund can find an index to compare themselves against that they can beat.
This is why we benchmark the fund managers that we recommend against their peers in the Morningstar analysis, rather than an arbitrary index that the fund manager has chosen.
Although Morningstar analyses the majority of fund managers operating around the world, this comparison is not perfect for a number of reasons (there are some fund managers who don’t participate in the research, sometimes the categories are so broad that the comparisons aren’t always apples with apples), we believe that it is a better monitor than choosing one of the millions of indexes that are available.
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By Carey Church