The Index Approach: Buying the Whole Market

The index approach means giving up picking individual securities in favour of buying the entire basket at once: you take a fund (or a set of shares you have assembled yourself) that replicates the composition of an exchange index, and you receive the market's result minus costs. The mechanism matters more here than the idea. An index is a rule: who gets into the basket, on what basis a security's weight is assigned, and when the composition is reviewed. A fund is an obligation to reproduce that rule. Everything that separates your outcome from the outcome of the index comes down to the management fee, the turnover costs inside the fund and the tracking error.

What exactly you are buying

The index itself is not traded — it is a calculated value. What is traded are the units of a fund that holds the securities in the proportions of the index constituent list, and it is the unit that you see in your order. This leads to something beginners overlook: you acquire an intermediary with economics of its own. It receives the dividends, pays infrastructure fees, and keeps a small cash balance for settlements and for filing creation and redemption requests. The instrument is defined in the glossary: index fund, and the list of available funds is in the funds section.

Where a security's weight comes from

In broad indices, weight is assigned by market capitalisation, adjusted for the share of stock in free float and capped by limits on the maximum share of any issuer. So "the whole market" in practice means "the market, weighted by the money that is actually in circulation". A large issuer with a small free-float weighs less than its size suggests.

An important distinction follows from this: a security's valuation does not affect its weight. A multiple such as 3,78 describes whether the company itself is expensive, but the weight of {{instrument:SBER}} in the basket is determined not by how expensive it is, but by its scale and how freely it trades. The index approach deliberately does not ask the question "expensive or cheap" — that question is asked by the value approach. For the composition and quotes of the constituent securities, see the stocks section.

Rebalancing: the work the fund does silently

The constituent list is reviewed on a schedule: some names leave the index, some enter, and the shares of the rest shift because of price movements. The fund is obliged to follow this — to sell what has dropped out and buy what has come in. That is turnover, it costs money, and you will not see it as a separate line: it has already been deducted from the unit value. If you replicate the index by hand, this work and these costs pass to you, and the problem of indivisibility is added on top — exact weights cannot be assembled in a small portfolio.

Costs — what really sets funds apart

Funds tracking one and the same index differ not in strategy but in the cost of ownership. What you need to look at is the management company's fee and the fund's total expenses, the spread in the order book (you pay it on every trade) and the deviation of the unit price from the calculated net asset value. For a long holding period, expenses matter more than the spread; for frequent trading, it is the other way round.

Dividends and the tax perimeter

When you hold shares directly, you receive the payouts into your account — the nearest ones can be seen here: {{dividend_calendar|limit=5}}. Inside a fund, dividends as a rule stay in the assets and increase the unit value rather than arriving as cash. This changes not the return as such but the moment at which the tax base arises: with reinvestment inside the fund, no tax arises until the unit is sold. The legal constant that sets the personal income tax base for investment transactions is inserted by the platform: 13%. The specific procedure is in the trust management rules of the fund you choose; there is no universal answer here, and the platform does not insert it.

Where the approach runs up against market structure

An honest caveat, without which this piece would be an advertisement. The Russian equity market is concentrated: weight is clustered in a narrow circle of issuers, and the sector structure is skewed towards commodities and financials. "Buying the whole market" here means getting a bet on a few sectors rather than genuine broad diversification. That concentration has to be reduced outside the equity index — for example, with the debt portion of the portfolio: bonds and OFZ.

How to check a fund before buying

Step 1 — find out exactly which index it tracks and read the methodology: what interests you is the weighting rule and the frequency of review. Step 2 — compare the total expenses of funds on the same index. Step 3 — look at the liquidity of the unit and the spread in the order book at the hour when you usually trade. Step 4 — clarify what the fund does with dividends. Step 5 — compare the performance of the unit with the performance of the index over an identical period; the gap is the price of execution.

The corporate background that affects the composition of the index is conveniently tracked through issuers' financial reports and the events calendar.