Indices are baskets of companies that are included in that basket and distributed according to some specific algorithm. Generally, larger and more valuable companies are "overloaded", meaning the more valuable a company is, the more weight it gets in the index. The market capitalization or company weighted value method is the basic principle of the world's most popular indexes. There is also an alternative method where every company in the index has the same weight, regardless of the size or value of that company. In such an index, there is a greater emphasis on smaller companies, which can often grow faster than large businesses. Research shows that in some market conditions, such as times of high market uncertainty, equal weight indexes can perform better than traditional indexes.
Annual returns for various popular global corporate stock indices*
* Data is for the period until the end of 2021 ** Equal weight index basket return
Indices can be created both from the largest companies of each national stock exchange, and by creating a basket with companies in different sectors. Similarly, such bull paper baskets are created not only for shares, but also for government and corporate bonds. There are specialized companies (such as MSCI) that focus directly on the creation and regular revision of various indices. Since the value of companies also changes along with stock price fluctuations, the distribution of companies in the index basket is reviewed regularly (quarterly or semi-annually), including including or excluding companies. Various adjustments can be made to the allocation algorithm of the Tapat index basket, for example, by limiting the maximum weight that one company can form in such a basket.
There are a number of financial companies in the world that have created exchange traded funds (ETFs) that replicate various stock indices. It enables investors to invest in baskets of stocks or bonds of their choice around the world. Among the largest providers of such index funds are iShares, Vanguard and Invesco. These are just some of the index fund providers in the world. It is important that when investing, investors carefully compare the commissions and liquidity of these funds. We have created a separate article on how to build your index fund investment portfolio.
On the other hand, the main stock exchange index of the Baltic States is the OMX Baltic Benchmark and in the last 5 years it has grown by an average of 8.5% per year. Accordingly, an investment in the largest listed companies of the Baltic States would have been quite a successful investment. This index combines the 22 most valuable listed companies of the Baltic States and includes such companies as Enefit Green, HansaMatrix, LHV and Kaubamaja. However, it is not the only stock index calculated by the NASDAQ stock exchange - there is also, for example, an index of the top 10 companies and an index of (almost) all companies. The following table compares their historical returns over different time periods:
*Data is for the period until March 31, 2023
Accordingly, in these selected time periods, the indices have had similar returns, but in the last decade, the index of the ten largest Baltic companies has given the best returns on average. Also, Baltic shares have given a significantly better return than the European stock market indices Stoxx 50, DAX and FTSE. Unfortunately, if an investor were now interested in buying the Baltic companies index, there would not be many options. There is only one Baltic index fund provider and it is managed by the Lithuanian company Orion. This investment fund follows the Baltic Benchmark index. Unfortunately, this fund has a very high annual management commission for an index fund - 1% (in contrast to the standard 0.1-0.4%). Also, this fund is difficult to buy and sell on the stock exchange because it has very little or even almost no liquidity. To solve this problem, we offer the investor to create his own Baltic stock index. How to do it - about it in a separate article.
Indices can be created both from the largest companies of each national stock exchange, and by creating a basket with companies in different sectors. Similarly, such bull paper baskets are created not only for shares, but also for government and corporate bonds. There are specialized companies (such as MSCI) that focus directly on the creation and regular revision of various indices. Since the value of companies also changes along with stock price fluctuations, the distribution of companies in the index basket is reviewed regularly (quarterly or semi-annually), including including or excluding companies. Various adjustments can be made to the allocation algorithm of the Tapat index basket, for example, by limiting the maximum weight that one company can form in such a basket.
There are a number of financial companies in the world that have created exchange traded funds (ETFs) that replicate various stock indices. It enables investors to invest in baskets of stocks or bonds of their choice around the world. Among the largest providers of such index funds are iShares, Vanguard and Invesco. These are just some of the index fund providers in the world. It is important that when investing, investors carefully compare the commissions and liquidity of these funds. We have created a separate article on how to build your index fund investment portfolio.
On the other hand, the main stock exchange index of the Baltic States is the OMX Baltic Benchmark and in the last 5 years it has grown by an average of 8.5% per year. Accordingly, an investment in the largest listed companies of the Baltic States would have been quite a successful investment. This index combines the 22 most valuable listed companies of the Baltic States and includes such companies as Enefit Green, HansaMatrix, LHV and Kaubamaja. However, it is not the only stock index calculated by the NASDAQ stock exchange - there is also, for example, an index of the top 10 companies and an index of (almost) all companies. The following table compares their historical returns over different time periods:
Annual returns for various stock indices of Baltic companies*
Accordingly, in these selected time periods, the indices have had similar returns, but in the last decade, the index of the ten largest Baltic companies has given the best returns on average. Also, Baltic shares have given a significantly better return than the European stock market indices Stoxx 50, DAX and FTSE. Unfortunately, if an investor were now interested in buying the Baltic companies index, there would not be many options. There is only one Baltic index fund provider and it is managed by the Lithuanian company Orion. This investment fund follows the Baltic Benchmark index. Unfortunately, this fund has a very high annual management commission for an index fund - 1% (in contrast to the standard 0.1-0.4%). Also, this fund is difficult to buy and sell on the stock exchange because it has very little or even almost no liquidity. To solve this problem, we offer the investor to create his own Baltic stock index. How to do it - about it in a separate article.