Editing Index fund (section)

==Indexing methods==

===Traditional indexing===
Indexing is traditionally known as the practice of owning a representative collection of [[Security (finance)|securities]], in the same ratios as the target index. Modification of security holdings happens only periodically, when companies enter or leave the target index.

===Synthetic indexing===
Synthetic indexing is a modern technique of using a combination of equity index futures contracts and investments in low-risk bonds to replicate the performance of a similar overall investment in the equities making up the index. Although maintaining the future position has a slightly higher cost structure than traditional passive sampling, synthetic indexing can result in more favorable tax treatment, particularly for international investors who are subject to U.S. dividend [[withholding tax]]es. The bond portion can hold higher yielding instruments, with a trade-off of corresponding higher risk.

===Enhanced indexing===
[[Enhanced indexing]] is a catch-all term referring to improvements to index fund management that emphasize performance, possibly using [[active management]]. Enhanced index funds employ a variety of enhancement techniques, including customized indexes (instead of relying on commercial indexes), trading strategies, exclusion rules, and timing strategies. The cost advantage of indexing could be reduced or eliminated by employing active management. Enhanced indexing strategies help in offsetting the proportion of tracking error that would come from expenses and transaction costs. These enhancement strategies can be:
* Lower cost, issue selection, [[yield curve]] positioning.
* Sector and quality positioning and call exposure positioning.