Talk:Indexing

The 2nd sentence under Structure is confusing.
 * What is a "universe"? Is it from here: Universe Of Securities.
 * What is equitizing? I think it means to maintain a cash balance invested in equities, but why would it be cash?

What I think it means: "These include replicating or sampling the index universe(cite) of securities, maintaining cash balances to remain 100 percent invested, and by employing trading strategies that minimize transaction costs."

(cite)A set of securities that shares a common feature such as the same market capitalization, industry or index. Universe Of Securities

--LadyGeek 00:57, 24 April 2010 (UTC)


 * I am by training and temper more of a poet than an engineer, with compression and ellipsis an almost native state of mind. Thus with thousands of indexes (FTSE alone has 1200+) covering up to 20,000 plus investment securities, "index universe of securities" is a compressed metaphor; that it relates to a term from technical analysis is accidental. One may rephrase this passage to taste.
 * The equitizing phrase is completely accurate (and as this is a topic sentence--terse and compressed--not expanded to Faulknerian heights and length) the term is subsequently defined in its section in the page.
 * Explanation: Almost all mutual funds hold a cash balance. This holding of cash will be a drag on fund returns during any period when stock returns outpace cash returns. Mutual funds hold cash as a result of shareholder cash flows into the fund (before the manager can purchase securities), as a holding from which to pay shareholder redemption of shares, and for active funds, a usual holding when the manager can not find securities of appealing valuation. Mutual funds tend to average 4 to 6 percent cash in their fund portfolios (the exact number can be found at ICI). In fact the term "cash drag" is used to describe an additional "cost" hurdle that an active manager must exceed in order to beat a benchmark return. For an index manager cash holdings will increase tracking error to the index.


 * The index manager reduces the tracking error of holding cash balances by equitizing the cash; that is by buying a futures contract (or sometimes an ETF) with the cash holdings. Since a futures contract is leveraged, an index manager can get an index return on the cash balance while remaining liquid to meet redemption of fund shares. Here is a simplified example.
 * The index manager has a $500,000 cash balance
 * The index manager buys an index futures contract placing a $10,000 cash deposit for holding a $500,000 index futures position.
 * The index manager now receives the index return on the futures ($500,000 worth assuming the futures track the index) while maintaining $490,000 cash liquidity from which to meet shareholder redemption requests. This procedure is known as equitizing cash. --Blbarnitz 12:24, 24 April 2010 (UTC)

I am an engineer by training with an analytical mind. I updated the equitization section to integrate your very enlightening example with the current work. --LadyGeek 17:52, 24 April 2010 (UTC)

How are index style boxes intended to be used? Indexing in the 21st Century says these boxes can help investors identify differences in methodologies, but how does that relate to investment decisions?

Equity style boxes (and fixed income style boxes) categorize risk vs. return. How does this align with index style boxes? I don't see the connection, and therefore don't see how to select index funds using this box. --LadyGeek 00:02, 6 October 2010 (UTC)