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What are the sorts of fundamental analysis done at the index level? What methods & metrics are used for determining the under/overvaluation of something like the S&P 500 index fund?

Do large institutional investors -- HF, HNW, endowments, etc -- do fundamental analysis of index funds they buy? Beyond simply deviance from NAV.

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    I think your question is too broad - there's not one way that "sophisticated" investors look at any instrument, let alone index funds. Value is only one way to look at picking investments; factor-based investing ("value" is one of many factors) is very common in the equity space. And fundamental analysis at the index level is very complex (if not impossible).
    – D Stanley
    Jul 10, 2023 at 15:03
  • I was just curious how various people do fundamental analysis at the index level. Or if it's done at all. I would assume somebody is doing/has tried, or has built tools to do it. That's what I was asking about. Do large institutionals really just buy index funds without fundamental analysis? I find that hard to believe. If you're buying an index fund, you are implicitly commenting on its fundamental value...whether you explicitly acknowledge that or not.
    – David
    Jul 10, 2023 at 15:06
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    Factor-based investing is more common than fundamental analysis (in my experience) at the index level. P/E is about the only fundamental ratio that I've seen used at that level (which translates to a commonly-used "value" factor). In other words, investors buy index funds to get exposure to certain factors, not because of mispricing.
    – D Stanley
    Jul 10, 2023 at 15:21
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    @David - There is no deviance from NAV for open ended mutual funds (the vast majority). You may get some deviance in a closed ended fund. Jul 10, 2023 at 16:00
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    Again, Fundamental analysis is not the only way to evaluate stock and is not really practical on funds (other then very high-level ratios like P/E). Factor-based analysis (e.g. what sectors does the fund have exposure to?) is more common than any type of fundamental analysis. They are not necessarily looking for "cheap" funds.
    – D Stanley
    Jul 10, 2023 at 16:17

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Most of what is called fundamental analysis is simply irrelevant for index funds.

Statistics are available for how well a fund tracks its selected index, and rating agencies express opinions (which may or may not be helpful) on comparative expected risk and return between funds in the same category. You can read each fund's prospectus for more insight into their general approach. And of course the fees are published.

But in an index fund you are investing in a very broad slice of the market. You generally can't, and don't want to, dive below that level into "fundamentals".

See other answers about investing in index funds. I buy one fund each of long-term, short-term, bond, reit, and international indexes, in a specific distribution. I maintain that distribution pretty much no matter what the market is doing, rebalancing as necessary. Near-zero effort, decent returns. I really don't look much deeper than that. Trying to time the market is a mug's game; you don't know when the top or bottom will be hit, so you rebalance to capture gains and trust that in the long term the model does what it's supposed to.

(Actually it's two funds of each type, since the ones I'm using inside my 401k aren't identical to the ones I'm using when investing directly. But I manage the mix as a single investment pool, maintaining the distribution that suits my risk tolerance and time horizon, as validated by my advisor's monte-carlo simulations.)

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  • Thanks for suggestion on rating agencies's analysis. But I'm not sure you don't want to dive into the fundamentals. I'd be surprised if you didn't have an opinion on buying an S&P index fund at height of 2000 dotcom bubble, vs. its 2001 nadir. I'd be surprised if you were truly indifferent to which situation you prefer to buy into.
    – David
    Jul 12, 2023 at 0:47
  • Be surprised, then. I've edited my response into the answer.
    – keshlam
    Jul 12, 2023 at 15:27
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    @David But how much fundamental analysis do you need to make that decision? Would you really forecast the financials and do DCF calculations on all 500 companies to determine that the index (which is just a sum of the prices of its component stocks) is overvalued? Or would you just look at the aggregate P/E? Not looking at fundamentals does not mean you're indifferent, you just look at things at a broader level, meaning taking a position on the direction of the market overall or a particular segment (e.g. tech, financials).
    – D Stanley
    Jul 12, 2023 at 15:45

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