If you're new to investing, you have probably heard of ETFs and Stock Indexes many times. Thus, you probably wonder which one is better. Or, you may want to know more about the two. But what are these two exactly?
Simply put, an exchange-traded fund or ETF is a type of security involving a collection of securities like stocks. On the other hand, a stock index is an index that measures a stock market or a subset of the stock market.
If you plan on investing but feel torn between stock and ETF, you may want to learn more about the two.
Without further ado, let's get into it!
What is a stock index?
As said earlier, a stock index is an index measuring a particular stock market or a subset of the stock market.
It does so to help investors compare current price levels with past prices. This way, they can calculate the market performance.
An index is a method to track a group of assets’ performance in a standardized way. Thus, a stock index tracks the stock market’s performance or a subset of it.
Indexes usually measure the performance of a group of securities intended to replicate a specific market area.
What are the major stock indexes?
There are about 5,000 stock indexes around the world. However, out of these thousands of indexes, both the media and investors have the three most broadly followed. These are:
Out of all three, the S&P 500 (simply the S&P) is the most commonly followed index. The S&P means the standard and poor while the 500 represents the companies it includes. In essence, it is an index measuring the performance of 500 large companies listed on stock exchanges in the United States.
Some S&P 500 ETFs:
Dow Jones Industrial Average
Another primary stock index is the Dow Jones Industrial Average, also known as Dow Jones. It is a stock market index measuring the performance of 30 large companies listed on stock exchanges in the United States.
Some Dow Jones ETFs:
From the name itself, the NASDAQ Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock market. Together with the two above, it is one of the three popular stock market indices in the U.S.
Some Nasdaq ETFs:
- iShares Nasdaq Biotechnology ETF (IBB)
- Reality Shares Nasdaq NexGen Economy ETF (BLCN)
- First Trust NASDAQ Cybersecurity ETF (CIBR)
The Russell 2000 is one of the major stock indexes. It measures the performance of around 2,000 smallest-cap American companies in the Russell 3000 Index. Further, this index consists of 3,000 of the most extensive U.S. stocks. It is also a market-cap weighted index.
Some Russell 2000 ETFs:
CBOE Volatility Index
The Cboe Volatility Index (also known as VIX) is a real-time market index. It represents the market's expectations for volatility over the next 30 days. Investors use this index to measure things when making investment decisions. Among these are levels of risk, fear, or stress present in the market.
The Euronext 100 is the blue-chip index of the pan-European exchange, the Euronext NV. It consists of the largest and most liquid stocks traded on Euronext. Each stock must trade more than 20 percent of its issued shares on the one-year rolling analysis.
ESTX 50 PR.EUR
The ESTX 50. PR.EU (EURO STOXX 50) is a stock index of Eurozone stocks created by STOXX. It is an index provider owned by Deutsche Börse Group. As of August last year, France (representing 36.4% of all total assets) and Germany (35.2%) dominated the index.
The DAX Performance Index (DAX) is a German blue-chip stock market index. It tracks the performance of the 30 largest companies on the Frankfurt Stock Exchange.
Further, it is a significant benchmark for German and European stocks. It lists significant companies through market capitalization and liquidity.
DAX ETFs: Global X DAX Germany ETF (DAX)
The CAC 40 is a French stock market index. It tracks the 40 most extensive French stocks on the Euronext Paris market capitalization. Further, the CAC 40 is the benchmark equity index for public companies in Euronext Paris.
The BEL 20 is the benchmark stock market index of Euronext Brussels. It consists of a minimum of 10 and a maximum of 20 companies traded at the Brussels Stock Exchange.
In essence, it's a free-float market capitalization-weighted index. It reflects the performance of the 20 largest and most actively traded shares listed on Euronext Brussels. Moreover, it's the most used indicator of the Belgian stock market.
The Nikkei 225 Stock Average (Nikkei225) is Japan’s primary stock index. Further, it's a barometer of the Japanese economy. It tracks the behavior of 225 large Japanese companies. It also covers a broad swath of industries.
The Nikkei 225 seems to be Japan’s equivalent to the Dow Jones Industrial Average. It includes the top 225 blue-chip companies on the Tokyo Stock Exchange.
Some Nikkei 225 ETFs:
- iShares MSCI Japan ETF (EWJ)
- iShares MSCI Japan Small Cap ETF (SCJ)
- iShares JPX-Nikkei 400 ETF (JPXN)
The FTSE 100 (also known as Footsie) is the Financial Times Stock Exchange Index. In essence, it's an index of the 100 largest companies listed on the London Stock Exchange.
The FTSE 100 is an index composed of the 100 largest companies by Market Capitalisation. People see this index as a good sign of the performance of major companies in the UK.
Some FTSE 100 ETFs:
- Vanguard FTSE Europe ETF (VGK)
- Vanguard FTSE Developed Markets ETF (VEA)
- Franklin FTSE Brazil ETF (FLBR)
- Franklin FTSE Mexico ETF (FLMX)
iBovespa (Índice Bovespa) simply refers to the Bovespa Index. It is the index of about 70 stocks traded on the B3 (Brasil Bolsa Balcão). It accounts for the majority of trading and market capitalization in the Brazilian stock market.
Some Bovespa ETFs:
- iShares MSCI Brazil ETF (EWZ)
- Direxion Daily Brazil Bull 2X Shares (BRZU)
- ProShares UltraShort MSCI Brazil (BZQ)
KOSPI Composite Index
The Korea Composite Stock Price Index (KOSPI) indexes all common stocks traded on the Korea Stock Exchange. This index is the representative stock market index of South Korea. In essence, it's like the S&P 500 in the United States.
MOEX Russia Index
The MOEX Russia Index (formerly MICEX Index) is the primary benchmark of the Russian stock market. The amount of component stocks varies, and it depends on liquidity and trading frequency.
The S&P/ASX 200 is a market-capitalization weighted and float-adjusted stock market index. It consists of stocks listed on the Australian Securities Exchange.
This index began on 31 March 2000 with a value of 3133.3, equal to all ordinaries’ value during that time.
The IPC Mexico means Índice de Precios y Cotizaciones. It is the weighted measurement index of 35 stocks traded on the Bolsa Mexicana de Valores. The recomposition of the index has its method originating and exposing on the BMV. Thus, it may change every quarter.
TSEC weighted index
The TSEC weighted index (also known as TAIEX) is an index of all the stocks in the Taiwan Stock Exchange. Each stock has a weight based on its market capitalization.
The said index excludes specific shares. Among these are "full delivery" shares, preferred shares, and shares listed for less than a month.
S&P/NZX 50 INDEX GROSS
The S&P/NZX 50 Index Gross is the main stock market index in New Zealand. It includes the 50 most significant stocks by free-float market capitalization in the New Zealand Stock Market (NZSX).
One thing to note is that the free-float capitalization calculation excludes blocks of shares more significant than 20%. Further, blocks between 5% and 20% are considered strategic.
The S&P MERVAL Index (MERVAL) is the most important index of the Buenos Aires Stock Exchange.
MERVAL is a price-weighted index. The market value of a portfolio of stocks gets selected based on certain aspects. Among these are market share, number of transactions, and quotation price.
The FTSE Emerging Index is an index that is part of the FTSE Global Equity Index Series (GEIS). It provides investors with a comprehensive means of measuring the performance of companies. In particular, it measures the Large and Mid Cap companies in the emerging markets.
Some FTSE ETFs:
- Vanguard FTSE Emerging Markets ETF (VWO)
- Vanguard FTSE All-World ex-US ETF (VEU)
- Vanguard FTSE Europe ETF (VGK)
MSCI Emerging Markets
From the name itself, the MSCI Emerging Markets Index deals with emerging markets. In general, it captures large and mid-cap representation across 27 Emerging Markets.
This index has 1,380 constituents. Further, it covers around 85% of the free float-adjusted market capitalization in each country.
Some MSCI Emerging Markets ETFs:
- iShares Core MSCI Emerging Markets ETF (IEMG)
- iShares MSCI Emerging Markets ETF (EEM)
- VictoryShares USAA MSCI Emerging Markets Value Momentum ETF (UEVM)
The MSCI World is an index that captures large and mid-cap representation across 23 Developed Markets countries.
The MSCI World Index has 1,582 constituents. Further, it covers approximately 85% of the free float-adjusted market capitalization in each country.
Some MSCI World ETFs:
FTSE All-World Index
The FTSE All-World index is a stock market index. It covers around 3,100 companies in 47 countries since 1986.
The FTSE Group published this index. This group is a wholly-owned subsidiary of the London Stock Exchange. Further, the said exchange is a product of the Financial Times’ merging and the London Stock Exchange.
Some FTSE All-World ETF: Vanguard FTSE All-World ex-US ETF (VEU)
The Morgan Stanley Capital International (MSCI ACWI) is also one of the major stock indexes. It tracks about 3,000 stocks in 49 developed and emerging market countries.
The MSCI ACWI represents a total market capitalization of tens of trillions of dollars. It also functions as a benchmark for global equity funds and as a guide to asset allocation.
Some MSCI ACWI ETFs:
- iShares MSCI ACWI Low Carbon Target ETF (CRBN)
- iShares MSCI ACWI ETF (ACWI)
- Shares MSCI ACWI ex U.S. ETF (ACWX)
GPR Global 100
The GPR Global 100 Index is a weighted index. Its basis is the shares of 100 leading property companies globally—the GPR Global 100 Index functions in a specific way. In essence, it represents the movements in the worldwide property stock market.
What is the difference between an ETF and an index?
ETF and Index Funds can be quite confusing. However, they differ in many ways.
For instance, the most significant difference between the two is that an ETF is tradeable throughout the day like stocks. On the other hand, index funds are only available once the price gets set at the end of the trading day.
Both are tradeable like stocks. Moreover, the investors can still enjoy the benefits of diversification in both.
Is it better to buy ETF or stocks?
Both ETFs and stocks have their pros and cons. However, ETFs offer some advantages over stocks.
For instance, if the sector’s stock returns have a tight dispersion, an ETF would come in handy. Moreover, if you can't gain an advantage through knowledge of the company, an ETF is also ideal.
If you plan on getting either of the two, consider opportunities to reduce risk while generating a return that beats the market.
Stocks will be ideal if there is a wide dispersion of returns. ETFs will be suitable if there's a narrow dispersion.
Whatever you choose from the two, you still need to stay updated on the stock sector. This way, you'll understand the fundamentals of the underlying investment.
Can you see what stocks are in an ETF?
In general, you can see what stocks are in a particular ETF. If you got an ETF and want to know what you hold, you can do it through the USA TODAY website.
You can go to the Money section of the website at money.usatoday.com. Afterward, enter the symbol or the ETF's name in the Get A Quote box, then click the Go button.
As soon as you do so, you'll be in an area dedicated to analyzing ETFs. In there, you can find any detail you want to know about ETFs. Among these are:
- Number of holdings
- Premium or discounts
Since ETFs can be quite simple, it can be tempting to buy such without checking the stocks included.
As always, a smart investor would try to see the stock it includes to grasp what he invests into as he goes on. Luckily, it's possible through the said website.
ETFs and Stock Indexes two things any investor should know, especially if you plan on investing through such. ETF offers diversification and ease of use, while stocks provide greater returns.
As always, an investor should learn both the pros and cons and the benefits and risks of both. This way, he can weigh down the options and see which better suits his preference and goals.