Once an index-based approach has been chosen, one of the most important decisions is which index provides the right exposure. Two ETFs may appear to offer similar exposure while tracking indices constructed in quite different ways. Those differences can influence concentration, diversification, risk and ultimately investment outcomes.
Look beyond the ETF label
Every index is governed by rules that determine which companies qualify for inclusion, how constituents are weighted, how often the index is rebalanced and how factors such as liquidity, free float and new listings are treated. These are not simply technical details. They determine what investors ultimately own.
A useful illustration is the different approaches index providers took to accommodating unusually large initial public offerings, such as SpaceX in 2026. Nasdaq and FTSE Russell introduced changes that allowed faster inclusion in certain circumstances, while S&P retained its existing eligibility requirements.
The point is not that one approach is right and another wrong. It is that different methodologies can produce different portfolios, even when the indices appear to represent broadly similar parts of the market.
Similar exposure can produce different outcomes
Consider two index-tracking ETFs offering exposure to US technology shares. One benchmark may give greater weight to the largest companies, while another may cap individual holdings.
One may admit a newly listed company relatively quickly, while another may require a longer trading history. Both can provide technology exposure, but their underlying holdings, concentration and risk characteristics can differ.
This is why choosing an index-tracking ETF primarily on price can overlook an important part of the decision. Fees matter, as do liquidity and the fund’s ability to track its benchmark efficiently. However, the starting point should be whether the benchmark itself provides the required exposure.
Index selection is a portfolio construction decision
A better question is therefore not simply, “Which ETF?” but “What role should this exposure play in the portfolio, and which benchmark best fulfils that role?”
“US equity”, “technology” or “emerging markets”, for example, tells only part of the story. What sits beneath the label and how that exposure interacts with the rest of a portfolio also matter.
That does not mean investors need to become index-construction specialists. It does mean the expertise behind selecting and implementing an index deserves greater attention.
Where index expertise makes a difference
At 1nvest, we don’t view an index simply as something to track.
Before selecting a benchmark, we assess its methodology, the exposure it creates and its suitability as a portfolio building block. That includes factors such as constituent eligibility, weighting, concentration, liquidity, diversification and long-term investability.
This thinking forms part of a broader investment process. Once the appropriate benchmark has been selected, the focus moves to implementing it efficiently and tracking it as accurately and consistently as possible.
The objective is simple: to understand not only what an index tracks, but how its construction shapes the exposure investors receive.
Index investing still requires judgement. The key decision moves from selecting individual shares to selecting the index. And when apparently similar indices can produce materially different exposures, the expertise behind that choice matters most.
