Index Based Definition

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In the context of ETFs, "index-based" refers to a type of ETF that seeks to replicate the performance of a specific market index. These ETFs are passively managed, meaning that they do not attempt to outperform the market through active stock selection or trading strategies. Instead, they aim to match the performance of the underlying index by investing in the same securities in the same proportions as the index. Index-based ETFs are often considered to be more cost-effective and transparent than actively managed ETFs. This is because they typically have lower expense ratios and their holdings are disclosed daily. Additionally, their performance is directly tied to the performance of the underlying index, making it easier for investors to track and evaluate their investments. Examples of index-based ETFs include the SPDR S&P 500 ETF (SPY), the iShares Core S&P Total US Stock Market ETF (VTI), and the Vanguard Total World Stock ETF (VT). These ETFs track broad market indices, providing investors with diversified exposure to the US or global stock market.

Related Terms

Index, Passive Management, Transparency, Expense Ratio