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ETF Styles

If you decide that you want to invest in an ETF that is linked to a particular index you can select among such benchmarks as:

  • Dow Jones
  • Russell
  • S&P/Barra

Under the conditions of a volatile market the difference in the rules that apply to each index become more distinct. Thus, each index performs in its own unique way.

The divergence in the style indexes is due to the different times at which they return to their initial state, referred to as reconstitution. For example, Russell restores its initial value and growth once every year, whereas S&P/Barra does it two times annually. The history presents several instances in which S&P/Barra has included a different set of stocks than Russell, which has been caused by a movement in the market occurring between June and December.

You should have in mind that index providers differ in their classifications of stocks belonging to either a growth or a style index. They also differ by the number of factors included in the classifications. For example, the S&P/Barra includes only price/book indicator to classify a company as either a growth or style. This leads to the fitting of a company in just one category. This is not the case in Russell classifications, since it adds long-term earnings growth, which leads to the potential inclusion of a company in both categories.

Six factors for classification are observed in the Dow Jones. What is more, another category is added for those stocks that cannot be classified as either growth or value. Indexes become more defined since these neutral stocks are not included in the value and growth indexes.

In order to eliminate too much of a turnover, the providers of indexes have drawn a clear distinction between indexes. Buffer zones for the purpose of limiting turnover have been applied by Morgan Stanley Capital International (MSCI), which maintains the Vanguard's US index funds. It is expected that Vanguard will soon enrich its portfolio of services by presenting to its clients new ETFs that are based on the style indexes of MSCI.

However, it has been debated that the strict categorization may lead to unproductive index turnover. The reason for this is that at times stocks move from one category to another due to a change in market conditions not a natural development in the company. For example, many high tech companies have moved to large-cap stocks due to the experienced boom, replacing some companies that really deserved their place. With the relief in the boom they were again moved away from these positions.

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