ETFs 101: A Look at Indexing Methodologies

Passive stock exchange traded funds generally follow a simple formula to reflect the performance of an underlying benchmark Index, but not all Indices are created alike. The varying indexing methodologies can generate different returns.

Most ETFs use a type of indexing or passive investment methodology that adjusts the weightings on component holdings within its investment portfolio to reflect that of an underlying index. Additionally, fund providers may use a sampling technique to select a few securities from an overall Index.

The majority of stock-related ETFs employ a market-cap weighted methodology where each stock component is weighted by their market capitalization in the original index.


ETFs 101: What is an ETF?

ETFs 101: What is a Bond ETF?