An index is a set of rules, not a photograph of the market

This works through how an index is built in the order the parts actually depend on each other.

Every index is a rulebook

An index provider publishes a methodology setting out which securities qualify, how they are weighted and how often the list is reviewed. Those rules cover minimum size, minimum trading volume, how much of the company is freely tradable and which country it gets assigned to. Two indices covering what sounds like the same market can hold noticeably different sets of companies purely because their qualifying rules differ.

A fund tracking one of them is therefore following a specific set of editorial decisions rather than the market as an abstract whole. This is not a criticism, since rules are what make an index reproducible, and a reproducible benchmark is what makes cheap tracking possible.

Free float and why it matters

Most large indices weight by free-float market capitalisation, which counts only the shares genuinely available for public investors to buy. Companies with large state or family shareholdings therefore appear smaller in the index than their total market value would suggest. This adjustment is what makes the index investable, because weighting by total value would require buying shares that are not for sale.

It also means your exposure to those companies is systematically lower than a naive reading of their size would imply. Free float is recalculated periodically, so a company's weight in the index can change without its share price having moved at all.

Reconstitution and the cost of changing

Indices are reviewed on a published schedule, adding companies that now qualify and removing those that no longer meet the rules. Every fund tracking the index has to trade around those dates, and trading in size at a widely known time carries a cost. That cost does not show up as a charge; it shows up as a small gap between the index return and the fund's return.

Index providers and fund managers both work to reduce it, using staggered trading and other techniques, with partial rather than complete success. Broader indices holding more companies tend to suffer less from this, because the securities entering and leaving are smaller relative to the whole.

Country and sector classification

Assigning a company to a country is a judgement involving where it is listed, where it is domiciled and where it trades, and these frequently disagree. A business listed in one country, headquartered in a second and earning most of its revenue in a third can be classified almost anywhere. This means a regional fund may give you considerably less exposure to that region's economy than the label on the front implies.

The same applies to sector labels, where large diversified businesses are assigned to whichever activity the classification system decides is primary.

Reading the top holdings tells you far more about what a fund owns than reading the name of the fund does.

Where the rules are less neutral

Screened indices that exclude particular industries, or select on stated characteristics, involve additional and considerably more contestable rules. Those rules are published, but they rest on definitional choices that reasonable people disagree about, particularly around where exclusion thresholds are set. Two funds with similar-sounding screening approaches can end up holding substantially different portfolios as a direct result of those choices.

In practice, none of this makes screened indices unsuitable; it makes the methodology document the only reliable description of what you would actually own. The further an index moves from simple size weighting, the more its rules resemble an active strategy being operated mechanically.

Adjust the size of it until it is something you would actually do tired.

What is actually worth checking

The fact sheet names the index, and the index name is the thing worth searching rather than the marketing name of the fund. The methodology document states the number of constituents, the weighting scheme and the review frequency within its first few pages. Comparing the number of holdings between two candidate funds is a quick proxy for how broad each of them really is.

Checking the largest ten holdings and their combined weight tells you how concentrated a supposedly diversified fund has actually become. That is perhaps fifteen minutes of work, done once, on a decision you may end up holding for several decades.

The takeaway

The index is the product. Read what it does before deciding which fund should follow it.

Pick the one that costs you least, and let the rest wait.