A Brave New World

July 01, 2005


This study also looked at the raw indexes that ETFs and equity-based index funds seek to mimic. As of December 31, 2004, there were 168 indexes in the Morningstar Principia database, all of which had a three-year performance history. Clearly, however, not all indexes are equally represented among ETFs and index funds. Therefore, in this study, the performance of index funds and ETFs was compared with the nine most commonly tracked indexes, which are listed in Figure 3. From among the 213 distinct index funds, a total of 132 "tracked" one of the indexes in Figure 3. (Note that the Principia database does not include information for the NASDAQ-100 Index; pricing data for this index was taken from Yahoo! Finance.)


Dow Jones Wilshire 5000 Measures the performance of all U.S. headquartered equity securities with readily available price data. Over 5,000 capitalization weighted security returns are used to adjust the index.
S&P 500 A market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S. stock market. Standard and Poor's chooses member companies for the index based on market size, liquidity and industry group representation. Included are the stocks of industrial, financial, utility and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied.
S&P 500/Barra Value (a.k.a. Barra Large Value) An index composed of 250 +/- stocks from the S&P 500 with higher book- to-price ratios.
S&P 500/Barra Growth (a.k.a. Barra Large Growth) An index composed of 250 +/- stocks in S&P 500 with lower book-to-price ratios.
S&P MidCap 400 Includes approximately seven percent of the capitalization of the U.S. equity market. This index is comprised of stocks in the middle capitalization range. At the original time of screening, this represented a $200 million to $5 billion market value range. Any mid-cap stocks already included in the S&P 500 are excluded from this index, which debuted on December 31, 1990.
S&P SmallCap 600 This small cap index consists of 600 domestic stocks chosen for market cap, liquidity and industry group representation. It is a market cap weighted index.
Russell 2000 Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, representing approximately eight percent of the total market capitaliza- tion of the Russell 3000.
NASDAQ-100 Representing 100 of the largest non-financial companies listed on the National Market tier of The Nasdaq Stock Market. The NASDAQ-100 Index reflects the largest Nasdaq-listed companies across major industry groups, including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
Morgan Stanley Capital International EAFE A free float-adjusted market capitalization index that is designed to meas- ure developed market equity performance, excluding the U.S. & Canada. As of December 2003, the MSCI EAFE Index consisted of the following 21 developed market country indexes: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, The Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.
Figure 3. The Stalked Indexes


Our analysis looked at the asset-weighted three-year annualized return, asset-weighted three-year tax cost ratio and asset- weighted expense ratio of each fund and index. The tax cost ratio is a statistic calculated by Morningstar and is a measure of tax efficiency. The lower the tax cost ratio the better.

All data were asset-weighted to reflect the different sizes (and therefore differential impact on investors) of index funds and ETFs.

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