On construction of index funds in South Africa

Abstract

Index funds, an increasingly popular form of investment in the US and UK since the 1970s, have recently emerged in South Africa. This paper examines two methods of constructing index funds in the South African environment. These two methods, namely stratification and optimisation, are empirically tested on the JSE and the results are contrasted with studies conducted on other exchanges. The suitability of the various statistics employed to measure tracking ability is also considered.

Keywords:

• Index funds
• tracking error
• stratification
• optimisation
• JSE