Editing Index fund (section)

==Diversification==
{{main|Diversification (finance)}}

[[Diversification (finance)|Diversification]] refers to the number of different securities in a fund. A fund with more securities is said to be better diversified than a fund with smaller number of securities. Owning many securities reduces volatility by decreasing the impact of large price swings above or below the average return in a single security. A [[Wilshire 5000]] index would be considered diversified, but a bio-tech [[Exchange-traded fund|ETF]] would not.<ref>{{cite web |url=http://www.vanguard.com/bogle_site/sp20040413.html |title=As The Index Fund Moves from Heresy to Dogma . . . What More Do We Need To Know? |access-date=2007-02-20 |last=Bogle |first=John C. |author-link=John Bogle |date=2004-04-13 |work=The [[Gary P. Brinson]] Distinguished Lecture |publisher=Bogle Financial Center |archive-url=https://web.archive.org/web/20070313082959/http://www.vanguard.com/bogle_site/sp20040413.html |archive-date=2007-03-13 |url-status=dead }}</ref>

Since some indices, such as the [[S&P 500]] and [[FTSE 100]], are dominated by large company stocks, an index fund may have a high percentage of the fund concentrated in a few large companies. This position represents a reduction of diversity and can lead to increased [[Volatility (finance)|volatility]] and [[financial risk|investment risk]] for an investor who seeks a diversified fund.<ref>{{cite web|url=http://www.spindices.com/documents/education/practice-essentials-equal-weight.pdf|title=Practice Essentials - Equal Weight Indexing|publisher=[[S&P Dow Jones Indices]]|access-date=2014-05-21|archive-date=2014-05-12|archive-url=https://web.archive.org/web/20140512223138/http://www.spindices.com/documents/education/practice-essentials-equal-weight.pdf|url-status=dead}}</ref>

Some advocate adopting a strategy of investing in every security in the world in proportion to its market capitalization, generally by investing in a collection of ETFs in proportion to their home country market capitalization.<ref>{{cite web|url=http://www.efficientmarket.ca/article/Globally_Efficient_Equity_Portfolio|title=Building a Globally Efficient Equity Portfolio with Exchange Traded Funds|access-date=2008-01-08|last=Gale|first=Martin|author-link=Martin Gale|archive-date=2018-11-16|archive-url=https://web.archive.org/web/20181116110450/http://www.efficientmarket.ca/article/Globally_Efficient_Equity_Portfolio|url-status=dead}}</ref> A global indexing strategy may have lower variance in returns than one based only on home market indexes, because there may be less correlation between the returns of companies operating in different markets than between companies operating in the same market.