Organizing the ETF Universe with Index Strategy Maps

Posted 06/05/2009, 9:00 am EST by Staff from ETFGuide.com

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 created 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 Maps use a different approach by organizing ETFs/ETNs by how securities are selected and weighted within their respective indexes. This provides an immediate point of reference through a simple graphical display of what index ETFs and ETNs are actually doing. Index Strategy Maps were developed and pioneered by Richard A. Ferri, CFA and author of The ETF Book (Wiley 2008).

Using Index Strategy Maps
ETFguide’s Index Maps are organized into nine grid shapes. 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. (See FIGURE 1 and FIGURE 2 below.)

Index Strategy Maps enable investors to quickly identify and distinguish the differences between the various indexing strategies being used by both ETFs and ETNs. This user friendly tool is easily applied to equity, fixed income and commodity indexes.

FIGURE 1: Index Strategy Maps

FIGURE 2: Sample Methods of Various Security & Weighting Methods

Examples of Security Selection Strategies