WHAT ARE INDEX SHARES?
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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.