Can I invest in an index?
In short—No. An index isn’t a physical basket of securities, but a mathematical construct that describes the market. You can’t invest directly in an index.
But you can invest in products that track indexes and which provide exposure to the markets they reflect. These include:
- • Exchange-traded funds
- • Mutual funds
- • Tracker funds
- • Derivatives
Think of the difference between investable products and indexes as the difference between manufacturers and research labs. The former offers products that the consumer can purchase. The latter, however, offers a service—one that targets not the consumer, but the product-makers directly.
So it goes for product issuers and index companies. Fund issuers offer a product, while index providers offer a service. And just as the research labs search for the ideas that a company may eventually commercialize, so too does the index provider come up with a framework that a fund issuer may use for future products.
It’s important to understand the distinction between indexes and investable products, because the misperception of index investability sometimes leads market participants to make misguided investment choices. For example, many investors, guided by recent headlines, now seek out indexes that are “low-cost” (generally meaning those with low licensing fees). But because indexes are not investable, the cost of an index should matter only to product issuers, not to retail investors.
We’ve outlined the duties of an index provider versus a product provider below:
- • Create, calculate and publish indexes
- • Define the rules that govern indexes
- • Monitor and manage how corporate actions affect indexes
- • Monitor and manage how companies and countries may be classified in indexes
Meanwhile, product providers:
- • Replicate indexes to create investible vehicles like ETFs or mutual funds
- • List these products on an exchange or otherwise make them available for purchase
- • Manage investment inflows and outflows
- • Market and distribute their products