How to choose the right index?

#1

Could somebody recommend a good book or a website with an overview of ETF indexes and with details how they are constructed, in particular how they weight different countries? I understand market weighting, but I don’t get how they come up with country weights and how this will change in the future.

#2

When I was looking for the right inices and ETFs, the decision was dominated by for which index (suitable) ETFs are available. No, I dont have a book for that :slight_smile:

Most of that you would want to invest is covered by vanguard & ishares, and for swiss specific stuff UBS & CS.
Justetf gives you a quite comprehensive overview for non-US ETFs, just use the ETF search.

My decisions were never made by which index exactly an ETF tracks but always which is the better ETF in tems of size, positions, costs.

to exactly read on the indexes, you’d have to read it up at the povider’s pages, e.g. FTSE, MSCI, StoXX, etc…

#3

If I buy a broad ETF like VT or something like MSCI ACWI, then I want to hold it for many years. So if in the future say UK goes down because of Brexit, I’ll be still tied to it as it has a lot of weight and won’t be downsized in the ETF. In my understanding market weighted ETFs are good because only successful companies are selected to be part of it. So if nobody will talk about Apple in 10 years, its weight in the index will decrease. However I don’t see how this works with countries, are the countries also weighted according to the number of companies fulfilling certain criteria or is it just a political choice of the index management?

By the way, why is nobody weighting countries according to their GDPs?

#4

It seems to me like you don’t understand how this market weighting thing works yet, but I find it a good question.

First of all, I don’t know if I would say that “only successful companies” are selected into the index. The companies that are selected, are the companies with the highest market value in the World. Market value means last traded price * quantity of outstanding stock. Mind you, there are big companies, that are privately owned (= not publicly traded), thus they are not included in the index, because you can’t buy them easily.

Using market weighting is so popular, because it has this cool property that when the price changes, the market value changes proportionally, and the quantity does not have to. So you don’t need to buy/sell any stock to maintain the proportion.

So an index like ACWI is just a list of largest companies in the World, it is not weighting by countries. It contains developed and emerging markets, a few thousand companies in total. It does not have frontier markets, but it doesn’t matter, since what it has already covers 99% of investable markets by market cap.

#5

OK, thanks for explaining. My confusion comes from seeing these pie plots in the fact sheets of ETFs where they show the percentage of different countries. So an index is then kind of always “fair” in the sense that it only reflects how many companies from a certain country can be traded. So if China has mostly small companies that are doing well, but are not on stock exchange, then China will be “underrepresented” in the index. But as soon as most of these companies go to stock exchange (which they do because they want money without going into debt, right?), then the weight of China in an index would automatically rise. So the index managers do not actually weight the companies consciously, it just comes out from the numbers. Does it make sense?

#6

I don’t have almost any knowledge about Chinese Stock Market, I only know that there are different share classes, which are available to different people to buy. For example the Class A share may be only purchased by Chinese citizens and some other special entities.

The fact sheets contain just the current summary split by country and also by industry. It’s not how the index is defined, it’s the other way round.

#7

I just found a comparison of two indices here (in German):

And in more detail here: