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Steven Cohen: Index funds have seen substantial growth around the world over the past decade
with more investors realizing the benefits of these funds. The starting point for any
investor considering expanding their indexing is the question what actually is an index?
An index is a group of securities -- it could be stocks or bonds -- that represent a certain
portion of an overall investable market. So let's take for example, the most popular index
in the United States, the S&P 500 Index – and that’s composed of the five hundred largest
U.S. stocks.
Indexes can be very broad. For instance, there is an aggregate bond index which reflects
the in total global bond market.
Or they can be very specific. Indexes for energy securities, pharmaceutical companies
or telecommunications companies. Now while you can't purchase the index itself – remember
it's just a portfolio of securities that represent a particular market or a portion of the market
– you can often purchase an indexing product that tracks the index. That can be done through
an index mutual fund or an exchange traded fund, or what we call an ETF.
Over the last several years we've seen that the popularity of index investing has grown
significantly because of many of the benefits that it provides to investors.
There is diversification because you're purchasing shares of a fund that are made up of several
different securities in a certain category, rather than just a single stock or a bond.
There is convenience. You don't have to go out and separately buy all five hundred stocks
in the S&P 500 for example. Instead you just buy one fund which gives you exposure to all
five hundred.
And, with that, comes cost efficiency. Cost efficiency of just buying one fund.
Here at BlackRock our iShares business is the largest ETF provider globally.
And we see investors who are seeking performance using index products and ETFs at the core
of their portfolios. So they're working to gain that overall diversification and cover
their broad positions in stocks and bonds and commodities and cash products.
That then frees up the investor, if they choose, to focus on specific areas in the market where
they feel they can outperform those benchmarks.
Other investors value the ETF exposures that we provide to niche markets that otherwise
might be difficult to access. So there are many ways to use and combine indexes in your
portfolio, but as with any investment, we recommend speaking with a financial advisor
about how to expand your indexing.