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Exchange-Traded Funds (ETF's) Has a New Spin:

Exchange-traded funds (ETFs) combine with alternate ways to index stocks to create a diversification tool.

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You thought indexes were a no-brainer, right? You buy a stock-index fund that mimics, say, the S&P 500 and you know you've got a fund with low costs that often beats the gains of many money managers. But indexing has gotten quite a bit more involved.

Not only have new ways of indexing been devised, but almost daily new exchange-traded funds (ETFs) based on these indexes are made available to investors. ETFs, which are like mutual funds in concept but trade on exchanges like stocks, offer alternatives and enhancements to traditional index funds. Some index-fund investors are hoping that because of the way their funds are constituted, they won't tumble as easily as traditional index funds have in this rocky market.

The Standard & Poor's 500 index is based on market capitalization. It takes its largest positions in the largest valued companies, and as the stocks of those companies rise and fall, so does the index. The value of the stocks in the S&P index is calculated by multiplying their quoted price by the number of shares outstanding. This method favors large cap and growth stocks.

Instead of market capitalization, nontraditional indexing uses alternative strategies to weight holdings. These newer indexes tend to lean toward small caps and value stocks. For the past seven or eight years, the market has favored that particular mix, so none of these newer indexes (the oldest of which began in 2003) have really been tested in changing markets – until now ...

Full Article:
By: Janice Fioravante | Correspondent of The Christian Science Monitor
From the August 20, 2007 edition
A new spin on stock-index funds
http://www.csmonitor.com/2007/0820/p13s02-wmgn.html