Arithmetic Index

  

Categories: Metrics, Index Funds

A group of securities whose overall value is determined by giving equal weight to each security’s performance rather than weighting by other factors like its market weight (think Nasdaq 100) or price weight (the Dow Jones).

It’s nothing more than a straight-up, vanilla average of the performance of all the securities in the index. Like if we have in our index 1,000 shares of GE at $15 and 2,000 shares of MO at $58 and 5,000 shares of AAPL at $200, even though the weighted average in the index of AAPL is way more than the other stocks in there, the arithmetic index ignores the weighting. It just takes the plain jane average of 15, 58, and 200 and reports what the arithmetic mean index did.

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Finance: What Are ETFs?275 Views

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Finance allah shmoop shmoop what are efs Well first this

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is the random financial terms you want to be asked

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in the financial term spelling bee and second you should

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know that e t f stands for exchange traded fund

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f's are kissing cousins of index funds with one key

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subtle but important difference f don't change at least generally

00:26

speaking an index fund might reflect the transportation industry and

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have so much exposure to ford gm united airlines tesla

00:35

etcetera But it's required tohave say sixty five percent of

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its exposure to companies based in the united states in

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its charter every month that index fund has to re

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balanced that exposure So if the auto companies do very

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poorly in a given month index fund has to re

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balance by buying mohr shares of those auto companies to

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make up the difference you know given that they've performed

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poorly relative toa airlines trucking company's railroads jeff howard segways

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and so on But in a t f the fund

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is basically set once and the shares just really kind

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of float if over a decade the auto companies do

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really well then in an e t f the auto

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companies will just have a dominant influence on the overall

01:19

performance of the fund The management company doesn't have to

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buy and sell shares regularly in an e t f

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till fulfill the legal promises it agreed to at the

01:28

outset of the fund in the way in index fund

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re balances its shares by buying and selling them So

01:34

what does that mean to you Well it means that

01:36

fc may drift in given directions like this guy For

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example a generic technology e t f might have had

01:43

a total exposure of say five percent to internet stocks

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in the beginning of nineteen ninety seven but amazon ebay

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yahoo netflix and a well performed massively better than the

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broader technology market which did well but just not omg

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dot com well so that five percent waiting twenty years

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later might be more like fifty percent or mohr of

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that particular e t f but one other key aspect

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of it is that it's traded like a stock i

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e in one block and trade throughout the day there's

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a bid and an ask price The bids are all

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added up and shares in the fund can be bought

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And sold at any time throughout the day Although the

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market sets the price of an f just like it

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does on a stock Well there now you're all ready

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for the financial term spelling bee And they might also

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