We all are very well aware of the fact that the Indicies (S&P 500, Dow Jones, Nasdaq) work through a pre-defined and pre-determined mechanism and the weight of the stocks included in these indicies defined as per the Index Policy.
For example - In case of S&P 500, the weight of a Stock (like AAPL) is calculated based on its capitalization or in simple terms, the S&P 500 index is constructed using a capitalization weighted index methodology. The market capitalization of each index member is also adjusted by a float adjustment.
When it comes to the ETF's, then ETF's doesnt use any pre-determined or pre-defined mechanism and it just follows the parent index. An ETF is often seen as pooled investment security which is very similar to the Mutual Funds. For example, the ETF of Nasdaq Index is QQQ and the ETF of S&P 500 is SPY and the ETF of Dow Jones is DIA & the movement in the ETF's is purely based on how the Parent Index is trading.
Does it mean that the movement of the QQQ will impact the movement of the Nasdaq ? or the movement of the SPY will impact the movement of the S&P 500 ?
The answer is NO, ABSOLUTELY NOT.
The reason is that the ETF's (like Mutual Funds) follows the PARENT INDICIES (S&P 500, Dow Jones, Nasdaq) and not the other way around. Because the movement of an Index depends on how the CONSTITUENTS of the index are trading.
For example, weight of AAPL (Apple Inc) is 11% in Nasdaq and 7.2% in S&P 500 and 3.5% in Dow Jones. This means if AAPL gives a movement of 1% then it will heavily impact the movement of the Nasdaq, will normally impact the movement of the S&P 500 and it will LEAST IMPACT the movement of the Dow Jones.
In another example, weight of AMZN (Amazon) is 5.5% in Nasdaq and 3.25% in S&P 500 and AMZN is NOT the part of the Dow Jones. This means a movement of 1% in AMZN will impact the Nasdaq index heavily, whereas it will impact the S&P 500 Index normally BUT it will NEVER impact the movement of the Dow Jones because its not the part of the Dow Jones.
Now i hope the concept is clear that its the INDICIES (S&P 500, Dow Jones, Nasdaq) which are defined & move through a mechanism; and ETF's (QQQ, SPY, DIA) just follow their parent indicies BUT are not responsible and DO NOT IMPACT the movement of the Indicies themselves. Other than that, its the CONSTITUENTS (STOCKS) of an index which defines the % movement (collectively) as per their respective weightage in the indicies.
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