Picking an Index Fund: What to Compare Before You Buy

Start with the index's rulebook: which assets are eligible, what they have to meet to get in, how weightings are assigned, and how often the list gets shuffled. Then open the latest holdings and check the obvious: which sectors and regions dominate, how much of the fund sits in the top few companies, and whether anything trades in a foreign currency. Even when a fund holds hundreds of names, the biggest positions can dominate its overall movements.

Now line up those big names against the funds you already own. Several funds with different names can hold a lot of the same companies, and only by comparing side by side do you see how much of any single stock you're really stacked in.

One quirk worth knowing: when a company gets dropped from the index, it usually just failed to meet the current entry or retention rules. Any gains or losses from the time you did hold it are already reflected in the fund’s net asset value.

Check the tracking benchmark in the fund's report, then make sure you're comparing like with like: same start and end dates, same currency, same treatment of dividends. Some index charts show price only; others assume dividends get reinvested. Fees reduce the fund’s assets, and holdings and trade execution also affect its tracking results.

Write down the ongoing costs, management fee, custody fee, and anything you pay when buying or selling yourself. When you calculate your own return, remember that fees already baked into the net value are already paid for, so don't deduct them again. More on that in Fund net asset value and your investment return.

An ETF listed on an exchange has a second price: whatever buyers and sellers agree to at that moment. The net value per share is the assets minus liabilities, divided across the shares. The quote on the exchange moves with the crowd.

Consider a hypothetical example, with all amounts in Chinese yuan. Say one fund unit has a net asset value of 1.00 yuan, and you buy it for 1.30. That's a 30% premium. The underlying assets then rise, net value climbs to 1.10, and the market calms down to match it. You sell at 1.10 and have lost 0.20 per share, about 15.38% off your purchase price, with no trading costs factored in yet. The gain in the underlying holdings simply got eaten by the extra you paid at the door.

So before you send an order, compare the current net value against the live quote, and keep an eye on the bid-ask spread. With funds that span markets, trading hours and currency moves add another layer: a net value published early in the day may already be out of step with what the assets are worth by the time you trade.

"Near historic lows" is a description of where one number sits inside some chosen sample. Swap a three-year window for a ten-year one, or trade trailing earnings for forecast earnings, and the same fund can jump to a very different spot in the ranking.

When you see a percentile chart, first find out what's underneath it: how long the data goes back, how often it was sampled, which earnings definition was used, and how rebalancing of the index itself was handled. Only then is it worth asking why earnings and price moved in the first place. If you're tempted to buy and sell at fixed percentiles, run the rule over the full stretch of data and count everything, the trades, the cash sitting idle between them, the fees, and see how it behaved in each market regime.

In the end, it pays to squeeze everything you've learned into a single comparison sheet: holdings and how concentrated they are, the tracking method, the fees, the gap between market price and net value, and what you're actually using the money for. Grade every candidate on the same questions, and the choice usually gets a lot quieter.

The long-form notes live in Index rules and fund trading prices, and the step-by-step on gradual buying is at Regular investing and purchase costs. Or head back to From investment returns to actual gains to pick the next piece.