When an index goes in for a bit of dental work. Also, a way to structure an equity index.
An index is a way of tracking the performance of a group of stocks. Think: the S&P 500, the Dow Industrial Average, etc.
Most indices are weighted in some way. Which means that some securities get more emphasis than others. The index doesn't just consist of one share of every stock. Some stocks have more influence...they're more heavily weighted in an index. Typically, this weighting is done by either price or market capitalization.
In a capped index, there's a limit to how much weighting any one stock can have. Even if it gets way ahead of the others in either price or market cap, the stock can't rise above a set weight within the index.
The goal here is to make sure that the index doesn't become overly dependant on any one stock. At that point, it ceases to be a useful tracker of the group and essentially becomes a proxy for the one stock. You might as well skip the middleman and just watch the price of the one stock.
It's like a band where the lead singer gets too famous and eventually the band has to break up. A capped index ensures that the Rolling Stones stay the Rolling Stones, and don't become...Mick Jagger and the Jaggerettes.
Related or Semi-related Video
Finance: What is a 12b1 fee?91 Views
Finance a la shmoop.. what is a 12b1 fee what a clever name like why don't they give
normal names to these things like fund admin expense fee or just name it Bob [Document with Bob written at the top]
but they don't so you just have to memorize what they mean anyway
mutual funds had to bear enormous communications related expenses in the
pre computer-internet everyone has an email address era delivering gobs of [Mail man arrives at house]
paperwork snail mail to its customers it was enough expense to them that well
they frankly just hated doing it and did more or less anything they could to [Man licking envelopes]
avoid having to deliver you know dead trees so along came the investment
advisors act of 1940 which basically recognized that mutual funds did in fact
have expenses that were more than bonuses to the senior partners the 12b1
fee system allowed a fairly set and standard amount of fees to be charged to
customers so that a given mutual fund could recoup the money it had to spend [Fund statement document appears]
mailing annual reports and performance data and tax information and all kinds
of other things to its customers the 12b1 system was basically a
pass through set of charges such that the customer paid for her own paperwork
incentivizing mutual funds to actually do a good job communicating with their [Woman receiving a trophy on stage]
constituency and it let the little guy mutual funds compete against the big guy
mutual funds who already had all that infrastructure of course the biggest
winner out of this entire deal yeah it was the trees especially the ones who [Tree given a first prize award]
got in early on Google
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