The Motley Fool, LLC is pleased to announce the creation of the Fool 100 Index! Composed of 100 Foolish stocks, it's designed to take the best ideas from The Motley Fool's top-notch investing team and make them available in index form. Below is an interview between Tim Hanson, the creator of the Fool 100 Index, and Motley Fool Asset Management's Matt Trogdon. Motley Fool Asset Management is a sister company of The Motley Fool.

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Matt: Tell me about the origin of the Fool 100 Index. What was the reason for its creation?

Tim: Not long after I started working at The Motley Fool, I came across an article by Bill Barker called "The 4 Best Words of Investing Advice." As it turned out, those words were not "Buy what you know," or "Buy low, sell high," but "Buy an index fund." Here's how Bill made the case for that:

"This is the most actionable, most mathematically supported, short-form investment recommendation ever. ... If you look up 'The Motley Fool' in the encyclopedia -- or at least on Wikipedia -- you'll find that we are 'famous for [our] view that, for the majority of people who have little time to keep track of stocks, the best investment strategy can be summed up in four words: 'Buy an index fund.'' That remains true. If you've got little time to keep track of stocks, this really is the best investment recommendation around."

Bill went on to stipulate that said index fund should also be no load, have a low annual cost and low turnover, and track a broad index.

Given that our best investment recommendation was to buy an index fund, it long bothered me that we didn't have an index of our own. After all, The Motley Fool had and has lots of stock ideas; it was just a matter of putting them together in a logical way. Ten years later we finally got around to it, and I think we can be proud of the result.

Matt: What kind of stocks are in the Fool 100 Index? How do stocks get placed in it? How do they get removed? How often will stocks get added or removed?

Tim: Companies in the index are incorporated and listed in the United States and are open buy recommendations in the research publications Motley Fool Stock Advisor, Hidden Gems, Inside Value, Income Investor, and Rule Breakers or rank among the top 150 ideas in The Motley Fool's Fool IQ research database. In other words, a stock has to be in that universe to be eligible for inclusion in the index. Then we rank them by market cap, and the index then becomes the largest 100. As a result, the Fool 100 is a market-cap-weighted index that measures the performance of the 100 largest active buy recommendations from The Motley Fool. A stock would fall out of the index if it leaves the universe from which the index is derived or if it's no longer one of the largest 100 in that universe. The index is reconstituted and rebalanced quarterly, which means stocks may generally be added and removed four times per year.

Matt: It seems everyone and his mother has an index now. How is the Fool 100 different, and why might investors be excited about it?

Below is the transcript of an interview between Tim Hanson, the developer of the Fool 100 Index, and Matt Trogdon, an employee of Motley Fool Asset Management.

Tim: The Motley Fool's historical performance speaks for itself, and what's most exciting about this index is that it's 100% Foolish. Every stock has been vetted and rated or recommended by a Foolish analyst, which is a big differentiator from any other index in existence.

Matt: Are there any particular qualities that consistently stand out in the companies that comprise the Fool 100 Index?

Tim: The best way to answer this is probably to compare the Fool 100 against another popular index, such as the S&P 500. If you do this, you'll see that companies in the Fool 100 tend to have higher profit margins and higher returns on equity and assets than the collection of stocks in the S&P 500. I think this is one factor that speaks to the high quality of these business. Having said that, the stocks in the Fool 100 also tend to carry higher valuations. That's also one factor that speaks to evidence of the quality of these business, but it makes this a more growth-oriented, rather than value-oriented, collection of stocks.

Matt: The Fool 100 appears to be overweight in technology and consumer stocks. Is there any significance to that?

Tim: I don't think it's a coincidence that the Fool 100 Index is more heavily tilted toward these sectors. Historically, these have been the sectors where Motley Fool analysts have made the most number of recommendations and also where, historically, those recommendations have earned the best returns. Additionally, and this is particularly true of the exposure to the technology sector, I think this makes the Fool 100 Index a bit more forward-looking than its peers. Global economic growth is more and more being driven by technological innovation, and I like that that fact is being reflected in our index.

Matt: You've been a stock-picker for a long time. What was it like for you, personally, to work on building an index?

Tim: More than a stock picker, I'm an industry-watcher, and I think it's been clear for a long time that the financial industry and its customers are more and more moving to passive investing products. And this makes sense. The fees are low, the diversification is instant, the implementation convenient, and the returns are in all cases comparable and in many cases superior to what one would get from competing products. What's more, I identify strongly with the Fool's mission to help the world invest better, and if only a minority of investors are going to actively own individual stocks, it was clear that we needed to do something else to achieve our mission. By providing an index that can serve as a basis for products that offer all investors diversification, convenience, and performance, I hope the Fool 100 can push us farther along on that path. So working on it has been rewarding and fun.

Matt: Broadly speaking, who should consider looking at the Fool 100 Index?

Tim: The Fool 100 Index might be interesting for people who want to make their investing portfolio more Foolish, and particularly for those who want to invest Foolishly without owning individual stocks or who may not have a lot of money to invest. That's because, at its core, the Fool 100 is just 100 of our best ideas in a ranked and allocated manner.

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