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By Paul Justice, CFA | 08-25-2010 11:22 AM

Picking the Right Index ETF

Morningstar's Paul Justice and Mike Rawson discuss the differences among the major index families and how to manage market exposures and taxes using ETF holdings.

Paul Justice: Hi there. I'm Paul Justice, director of North American ETF research at Morningstar. ETFs have opened up the options for people in accessing asset classes that were really difficult to get to before. But really I think one of the best parts of the ETF industry is the low cost access to pure index funds that are widely available on the market.

Today to discuss some of the index families with us is ETF analyst, Mike Rawson.

Mike, thanks for joining me.

Michael Rawson: Thank you, Paul

Justice: So, there are so many options out there for people, and I think a great way to gain pure equity exposure, pure beta exposures, as we like to call it, is broad based index funds. There are so many choices for them out there. Could you give us an overview of some of the major index families that are available and some of the key similarities that they have with each other?

Rawson: Absolutely, for investors who are new to ETFs, the wide range of ETF options seemed a little bit daunting and overwhelming, but the one great way to use ETFs is again, that pure index beta exposure that you mentioned, and there are several different families of indexes that an investor can choose from. There is the Dow Jones family of indexes, Standard & Poor's, Russell, and MSCI.

Now the differences between those are not substantial, but typically an investor would want to try to avoid having overlapped with the one family of indexes to another. So, typically, if you have an S&P 500 fund, you may want to stick with the S&P family of funds to get your mid-cap and small-cap exposure; that way you're sure to avoid any unnecessary overlap.

Justice: What you're saying is, typically it's good to stick with that same index family once you've started?

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