Important Information

You are visiting the international Vantage Markets website, distinct from the website operated by Vantage Global Prime LLP
( www.vantagemarkets.co.uk ) which is regulated by the Financial Conduct Authority ("FCA").

This website is managed by Vantage Markets' international entities, and it's important to emphasise that they are not subject to regulation by the FCA in the UK. Therefore, you must understand that you will not have the FCA’s protection when investing through this website – for example:

  • You will not be guaranteed Negative Balance Protection
  • You will not be protected by FCA’s leverage restrictions
  • You will not have the right to settle disputes via the Financial Ombudsman Service (FOS)
  • You will not be protected by Financial Services Compensation Scheme (FSCS)
  • Any monies deposited will not be afforded the protection required under the FCA Client Assets Sourcebook. The level of protection for your funds will be determined by the regulations of the relevant local regulator.

If you would like to proceed and visit this website, you acknowledge and confirm the following:

  • 1.The website is owned by Vantage Markets' international entities and not by Vantage Global Prime LLP, which is regulated by the FCA.
  • 2.Vantage Global Limited, or any of the Vantage Markets international entities, are neither based in the UK nor licensed by the FCA.
  • 3.You are accessing the website at your own initiative and have not been solicited by Vantage Global Limited in any way.
  • 4.Investing through this website does not grant you the protections provided by the FCA.
  • 5.Should you choose to invest through this website or with any of the international Vantage Markets entities, you will be subject to the rules and regulations of the relevant international regulatory authorities, not the FCA.

Vantage wants to make it clear that we are duly licensed and authorised to offer the services and financial derivative products listed on our website. Individuals accessing this website and registering a trading account do so entirely of their own volition and without prior solicitation.

By confirming your decision to proceed with entering the website, you hereby affirm that this decision was solely initiated by you, and no solicitation has been made by any Vantage entity.

I confirm my intention to proceed and enter this website Please direct me to the website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom

By providing your email and proceeding to create an account on this website, you acknowledge that you will be opening an account with Vantage Global Limited, regulated by the Vanuatu Financial Services Commission (VFSC), and not the UK Financial Conduct Authority (FCA).

    Please tick all to proceed

  • Please tick the checkbox to proceed
  • Please tick the checkbox to proceed
Proceed Please direct me to website operated by Vantage Global Prime LLP, regulated by the FCA in the United Kingdom.

×

Copy Trade from just $50

Copy Trade Now >
Copy Trade from just $50
View More
SEARCH
  • All
    Trading
    Platforms
    Academy
    Analysis
    Promotions
    About
  • Search
Keywords
  • Forex Trading
  • Vantage Rewards
  • Trading Fees
  • facebook
  • instagram
  • twitter
  • linkedin
  • youtube
  • tiktok
  • spotify
6 Types of Index Funds And How To Choose One 

TABLE OF CONTENTS

6 Types of Index Funds And How To Choose One 

6 Types of Index Funds And How To Choose One 

Vantage Updated Tue, 2023 May 2 07:20

Read this article for an introduction into index funds before we dive in.  

Types of Index Funds You Can Find 

There are different kinds of index funds in the market. Here are six of them: 

#1 Market-Capitalisation Index Funds 

This particular bracket of index funds derives its value from the market capitalisation of the companies the indices track [1].  

The managers of these index funds allocate a larger percentage of the fund to companies with a large market capitalisation, instead of using an equal distribution model. That means stocks with a larger market capitalisation will have a higher weight in the index, whereas stocks with a smaller market cap will have a lower weightage.  

Hence, the index fund performance would depend on the performance of the companies with larger market cap. 

Examples of market-cap weighted index funds include: the NIFTY 200 Index Fund, the NASDAQ composite, and the popular S&P 500 [2].  

#2 Broad Market Index Funds 

A broad market index fund attempts to replicate the performance of a huge collection of stocks representing a large section of the stock market. They attempt to capture the stock market’s total performance, making them an investment vehicle for long-term investors to consider [3]

You can diversify your portfolio using broad market index funds that follow large-cap indices like the Wilshere 5000 Total Market Index, the Russell 3000 Index, and the Vanguard Total Stock Market Index Funds [4]

#3 Equal-Weight Index Funds 

An equal-weight index fund works opposite to a market cap index fund. 

Instead of weighting each stock in an index based on its market capitalisation, equal-weight index funds use equilibrium. Every stock in the index carries the same weight, regardless of their market cap, and it eliminates the chances of an over or underweighted market cap index [5].  

For instance, if your index fund holds 10 publicly traded companies, each company has a weight equal to 10% of the entire index fund.  

Equal-weighted index funds offer more diversification. Since all the stocks in the index have identical weighting, they all have an equal impact on the index fund’s performance. 

#4 Sector-based Index Funds 

Sector-based Index funds are also popular among investors. These funds focus on companies that are operating in the same industry or market [6]. Investors can choose sector-based index funds to gain exposure to specific sectors such as technology, healthcare, energy, and finance.  

The performance of these index funds is closely tied to the performance of the industry they track. Examples of sector-based index funds include the Technology Select Sector SPDR Fund, the Financial Select Sector SPDR Fund, and the Energy Select Sector SPDR Fund [7]. Sector-based index funds can be used for diversification or to take advantage of opportunities in specific industries.  

#5 Smart Beta Index Funds/ Factor-Based Index Funds 

Smart Beta index funds, also known as factor-based index funds, offer an alternative to the traditional market capitalisation method of creating an index fund. These funds are a type of actively managed funds that aim to strategically shift investment portfolios towards specific stock indicators [8]

In addition to market capitalisation, indicators such as dividend yield, price-to-earnings (PE) ratio, cash flow, book value, and sales can be considered when creating such index fund. Incorporating these metrics can help in selecting companies with strong valuations for an index portfolio. 

With the advent of advanced computer technology, data analytics tools have become increasingly sophisticated. These tools can analyse intricate data streams and financial metrics to uncover insights. The resulting data can be used to group stocks according to factors such as momentum, quality, value, volatility, and other characteristics. 

#6 Custom Index Funds 

A typical index uses a “one size fits all” model. However, with more data processing capacity available, there’s room for much greater customisation based on the preference of the fund manager or investor. That’s where Custom Index funds come into play [9]

Custom Index Funds typically employ more complex or targeted strategies than conventional index funds. Instead of tracking an existing market index, there are more freedom for Custom Index Funds to design custom-built indexes to select its own portfolio of investments.   

How to Pick the Right Index Fund 

index funds

If you are risk conscious as an investor, you may consider index funds which can be an asset to diversify and manage risk. Here’s what you need to know about selecting the right index fund [10]

Research the types of index funds 

Conduct research to understand the types of index funds available and portfolio of investments tracked by these index funds.. 

Also, dive deep and explore how these index funds performed in the past. Consider factors like market behaviour during bull and bear markets, and the fund’s annual returns. 

Check the companies listed in the fund 

Knowing the companies listed in an index fund can help you make an informed decision. You can always select an index fund with a basket of stocks you like or prefer. Always pick a fund you’re familiar with, and where possible, seek the advice of an investment professional. 

Transaction costs 

Transaction costs are an important consideration when selecting an index fund. Look for funds with low expense ratios and avoid those with high trading fees. These costs can eat into your returns over time, so it’s important to choose a fund with lower expenses wherever possible. 

Now that you’ve learned how to pick the right index funds, why not take your knowledge to the next level? Check out our article on “4 Popular Indices Trading Strategies” to further improve your understanding of trading indices.  

Trade Indices via CFDs with Vantage Markets 

New to trading products like indices that offer instant diversification? Open a demo account with Vantage Markets today and practise your trading strategies. Use our virtual funds to test out the success rate of your strategies in our state-of-the-art platform before putting up real capital for your investments.  

References

  1. “8 Types Of Index Funds: Definition, Strategies, And Risks – ET Money”. https://www.etmoney.com/learn/mutual-funds/index-funds-definition-8-different-types-strategies-and-risks/ . Accessed 15 Jan 2023 
  2. “Capitalization-Weighted Index: Definition, Calculation, Example – Investopedia”. https://www.investopedia.com/terms/c/capitalizationweightedindex.asp . Accessed 25 April 2023 
  3. “8 Types Of Index Funds: Definition, Strategies, And Risks – ET Money”. https://www.etmoney.com/learn/mutual-funds/index-funds-definition-8-different-types-strategies-and-risks/ . Accessed 15 Jan 2023 
  4. “What is Broad Market Index Fund – Angel One”. https://www.angelone.in/knowledge-center/mutual-funds/what-is-broad-market-index-fund . Accessed 25 April 2023 
  5. “8 Types Of Index Funds: Definition, Strategies, And Risks – ET Money”. https://www.etmoney.com/learn/mutual-funds/index-funds-definition-8-different-types-strategies-and-risks/ . Accessed 15 Jan 2023 
  6. “What are sector and specialty funds? – Vanguard”. https://investor.vanguard.com/investor-resources-education/understanding-investment-types/what-are-sector-specialty-funds . Accessed 15 Jan 2023 
  7. “Sector ETFs – State Street Global Advisors SPDR”. https://www.ssga.com/us/en/intermediary/etfs/capabilities/sector-investing/sector-and-industry-etfs . Accessed 27 April 2023 
  8. “What are factor-based funds? – Vanguard”. https://investor.vanguard.com/investor-resources-education/understanding-investment-types/what-are-factor-based-funds . Accessed 15 Jan 2023 
  9. “Custom Indexing: What it is, and why it could change the way we look at passive fund investments – Stockhead”. https://stockhead.com.au/news/custom-indexing-what-it-is-and-why-it-could-change-the-way-we-look-at-passive-fund-investments/ . Accessed 15 Jan 2023 
  10. “How to Invest in Index Funds – The Motley Fool”. https://www.fool.com/investing/how-to-invest/index-funds/ . Accessed 15 Jan 2023
  • vantage academy open account

    Open Trading Account

    Discover the endless trading possibilities with our cutting-edge platform, designed to empower both beginners and seasoned traders alike.

  • vantage academy app

    Download Vantage App

    Trade on the go with the Vantage All-In-One Trading App, where smooth execution and market access come together in the palm of your hand.

  • vantage academy start trading

    Start Trading

    Are you an existing user? Login to your account to start trading 1,000+ products including forex, indices, gold, shares and more.