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Investor Benefits
» Quickly identifies indexing strategies of ETFs and other index based products
» Classifies ETFs by their indexing strategy
» Lays groundwork for better portfolio construction and management
» Easy to understand for both individual and professional investors
 
Fact Sheet
The Methodology Behind Index Strategy BoxesT
 
Background
The explosive growth of the ETF marketplace has lead to the introduction of indexes that use alternative methods of security selection and capitalization weighting. The sheer number of financial products has been followed by confusion and no clear cut methods for investment analysis.
 
New index strategies have become far too complex for traditional classification methods that rely solely on company size and investment styles. Index Strategy BoxesT use a different approach in classifying ETFs: how securities are selected and how securities are weighted. This provides an immediate point of reference through a simple graphical display of what index based products are actually doing. Index Strategy BoxesT were developed and pioneered by Richard A. Ferri, CFA of Portfolio Solutions, LLC.
 
Building Better Portfolios
A clear understanding of how indexes are assembled and managed is imperative when constructing an investment portfolio of ETFs and index based products. Index Strategy BoxesT allow for the informed evaluation and comparison of financial products based upon their actual indexing strategies - not by how they're labeled by marketers. Investors wishing to manage exposure to different indexing strategies can reference Strategy BoxT classifications to get a precise picture of the resulting portfolio.
 
For Financial Institutions
Index providers and investment managers have an important responsibility to investors. Among these responsibilities is to disclose and clearly communicate the index strategies behind their products. Index Strategy BoxesT helps financial institutions to explain their products in a logical, meaningful, and uniform manner. The methodology also helps providers determine if they are pricing their products in-line with similar strategies.
 
Giving Financial Context
Index Strategy BoxesT are a major step forward in investment research. This tool can be seamlessly applied to index products in all asset classes and also provides much needed perspective in the analysis of important financial metrics, such as the cost, performance, and tracking error. It's now possible to search, sort, and compare ETFs by their Index BoxT classification at ETFguide.com. This innovative financial tool reduces the time spent analyzing index based products and aims to improve investment decisions.
 
Index Strategy BoxesT
 
 
 
Using Index Strategy BoxesT
ETFguide's Index Strategy BoxesT are organized into nine grid shapes and each shape represents a different index strategy.
 
The vertical axis categorizes index strategies into three broad security selection methods: passive, screened, and quantitative. The horizontal axis categorizes index strategies into three broad security weighting methods: market capitalization, fundamental, and fixed/equal weight.
 
Index Strategy BoxesT enables investors to quickly identify and distinguish the differences between index security selection and weighting strategies. This user friendly tool is easily applied to equity, fixed income and commodity indexes.
 

»  Security Selection Strategies and Sample Methods
 
 
Passive Screened Quantitative
-- Full Replication -- Fundamentals -- Economic Cycles
-- Sampling Strategies -- Exchange Listing -- Fundamentals
-- Buy & Hold -- Thematic -- Momentum/Technical
-- Single Securities -- Social Responsible -- Multi-Factor
 
The vertical axis of Index Strategy BoxesT represents the primary strategy in the selection of securities ("security selection") from the financial markets. Indexes that fall into each category will typically have one of the security selection methods described above.


»  Security Weighting Strategies and Sample Methods
 
 
Capitalization Fundamental Fixed Weight
-- Full Cap -- Dividends -- Equal Weight
-- Free Float -- Financial -- Modified Equal
-- Constrained -- Security Prices -- Leveraged
-- Liquidity -- Momentum -- Short (inverse)
-- Production -- Qualitative Factors -- Long/Short
 
The horizontal axis of Index Strategy BoxesT represents the primary strategy in weighting securities ("security weighting") within an index. Indexes that fall into each category will typically have one of the security weighting methods described above.
 
Security Selection + Security Weighting = Index Strategy BoxesT


 
More Research
Further information about Index Strategy BoxesT is available in The ETF Book by Richard A. Ferri, CFA. A complete database of ETFs and index based products organized according to this methodology is available at ETFguide.com.
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