| Index Strategy Box FAQs |
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| FAQs about Index Strategy Boxes™ |
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| What are Index Strategy Boxes™? |
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| Index Strategy Boxes™ are a valuable financial tool that classifies exchange-traded funds (ETFs), exchange-traded notes (ETNs), and other index based financial products by how they select and weight securities inside their index. Each box is graphically organized into nine grid shapes with each shape representing a different index strategy. |
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| Why are Index Strategy Boxes™ needed? |
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| Index Strategy Boxes™ are a major step forward because they allow investors and financial professionals to quickly distinguish between indexing strategies of ETFs, ETNs and other index based products. |
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| This innovative financial tool is rigorous and systematic in its approach to classifying ETFs. It reduces the time spent analyzing index based products and aims to improve investment decisions. |
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| How can Index Strategy Boxes™ help investors? |
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| By using ETFguide’s Strategy Box™ database, you can search, sort, and compare ETFs by their actual index strategy – not by how fund marketers have labeled these products. |
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| Also, instead of being limited to asset class or investment style comparisons, Index Strategy Boxes™ helps investors to analyze important financial metrics, such as the cost and performance of ETFs by their corresponding index strategy. |
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| Are Index Strategy Boxes™ the same as ETF ratings? |
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| No. Index Strategy Boxes™ do not attempt to rate the viability of an index strategy or to render an investment opinion about expected returns. Instead, Strategy Boxes™ uniformly organize funds according to their actual index strategy. This simplifies the analysis of ETFs, ETNs and other index based products. |
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| How are Index Strategy Boxes™ different from other financial tools? |
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| Most financial tools are generally limited to evaluating ETFs by their asset class or by their investment style (growth, blend, or value) and size (large, mid, or small). |
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| Index Strategy Boxes™ goes one step further by explaining the operation of the indexes behind the ETFs. The two simple factors for index classification are: 1) how securities are selected (passive, screened, or quantitative) and 2) how securities are weighted (capitalization, fundamental, or fixed weight). |
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| Using Strategy Boxes™ alongside other financial tools can assist in providing investors with a more complete picture. |
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| The FTSE RAFI index ETFs are classified as “passive”, yet they’re “fundamentally” weighted. How is it possible to categorize an index as both passive and fundamentally weighted? |
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| FTSE RAFI based ETFs select securities "passively" and those stocks are weighted "fundamentally". The RAFI based ETFs do not employ filters or quantitative methods to select securities. Rather, they use passive selection that combines cap weight and three other factors. That results in a selection that closely replicates indexes that are selected using only market capitalization. As such, from a practical standpoint, RAFI indexes are passive selection (not screened or quant). The main difference in RAFI indexes is in the weighting of stocks. The selected RAFI stocks use a multi-factor fundamental weight rather that capitalization weight. |
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| How do Index Strategy Boxes™ work for exchange-traded products linked to a single commodity or currency? |
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| There are several single security indexes in the commodities and currency markets. For example, the spot price of gold is the index used for some gold ETFs. Single security indexes are always considered to be passively selected and cap weighted. |
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| Can Index Strategy Boxes™ be applied to ETFs tracking bonds, commodities, and currencies? |
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| Yes. Index Strategy Boxes™ are a rigorous and uniform method for classifying ETFs – a system that works across multiple asset classes. |
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| With currencies, the single currency price becomes the index. It is a passively selected, cap weighted, single security index. |
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| In the Lehman Brothers Aggregated Bond Index, bonds are weighted by the size of the debt issue outstanding in relation to the rest of the bonds in the index. |
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| In the S&P GCSI Commodity Index, production is the factor that is used as capitalization in an attempt to estimate the impact each commodity has the global economy. |
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| Why are leveraged ETFs from ProShares and Rydex Investments categorized as fixed weight indexes? |
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| Fixed weighting can be at the security level, the industry level, or at the market level. When a fund is designed to achieve a return of 2 times the market, it has a fixed market leverage of "plus two." When a fund is short the market, it has fixed market leverage of "negative one". |
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| What’s the difference between screened and quantitative indexes? |
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| Screened indexes are created to eliminate securities that have unwanted characteristics or lack certain attributes. For example, companies that don’t pay a regular quarterly dividend are filtered out of dividend indexes. The remaining securities result in a screened index of dividend paying stocks. Another example of a screened index is one that selects stocks by its exchange listing. |
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| Quantitative indexes typically use advanced computer modeling that employ complex equations. The intent of quantitative selection is to identify securities that are believed to have superior return characteristics among the universe of securities they’re chosen from. Many of these indexes use hidden or proprietary formulas that aren’t fully disclosed to investors. |
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| How did the concept of Index Strategy Boxes™ originate? |
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| Index Strategy Boxes™ were pioneered and developed by Richard A. Ferri, CFA of Portfolio Solutions, LLC. The rapid growth of the ETF marketplace has lead to confusion and no clear cut methods for investment analysis. In
doing research for The ETF Book (John Wiley, 2007), Ferri saw the need for a categorization method. He created the classification and introduced it to the marketplace through his book and ETFguide.com in late 2007.
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