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  Monday November 20, 2017

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WHAT ARE INDEX SHARES?
Learn even more about this topic with the Encyclopedia of Personal Finance™

Index shares are investments that track the performance of a specific index, such as the Dow Jones Industrial Average or the S&P 500.

Rather than buy the stocks of the 500 companies that make up the S&P 500, you can buy an index share that mimics the S&P 500. This allows you to diversify your portfolio with just one transaction.

An index share is actually a unit investment trust (UIT) that seeks to duplicate the performance of an index.

It is similar to a mutual fund except that it is a fixed portfolio of securities. The investment trust buys the securities that make up the particular index in a proportional manner so that its performance is very closely related to the performance of the index. The investment trust does incur some minimal management expenses, which are deducted from its cash distributions to its shareholders.

Index shares, unlike index funds (mutual funds), are actively traded on the stock market just like regular stocks. The index shares that we discuss in this tutorial—Spiders, DIAMONDS, and WEBS—are all traded on the floor of the American Stock Exchange.

All right, we now understand what index shares are—but why should you invest in them? In the next section, we will discuss some of the advantages and disadvantages of index shares.




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