What are Index Funds
In the last decade, index funds have become one of the most popular investments in America. Index funds are a type of mutual fund that is used to invest in a variety of stocks and other securities that match the performance of a particular market benchmark, such as an index like the S&P 500 or Dow Jones Industrial Average. These funds enable investors to own all-or-nothing stakes in various companies, without having to do any research on which ones they should buy–the fund will automatically track its target index by owning shares from those companies proportionally. In this blog post, we’ll discuss what index funds are and go over some pros and cons associated with them!
Why do people use index funds?
Index funds have been shown to be the most effective type of mutual fund at maximizing returns, and as such, it is not surprising that investors began pouring money into them. Between 1987 and 2013, index funds outperformed actively managed mutual funds in all asset classes–most notably by a huge margin of almost 20 percentage points per year (that is, the S&P 500 returned an average of over 19%, while comparable active equity mutual funds only saw returns around 11%). This trend has continued through 2015 as well.
What are the downsides to
investing in index funds?
While index funds have a lot going for them, they do come with a few downsides as well. First and foremost, since these vehicles track their indexes by buying shares from the companies that make up those benchmarks in proportion to how large each company is within it, some argue that this creates an inherent bias towards larger companies–and against smaller ones. Since over half of the value of these indexes is represented by just three companies, this means that index funds have a large amount of exposure to those three–and would thus be ignoring smaller players. For example, as an investor in the S&P 500 Index fund you own shares from Apple Inc., Microsoft Corporation, and Exxon Mobil Corp.–you wouldn’t own anything from any small business or startup company.
Secondly, there are some costs associated with
What are index funds? Investment vehicles that seek to track the performance of a stock market index What are the downsides to
What are some examples of index funds?
While the S&P 500 Index and Dow Jones Industrial Average are two of the most well-known indexes in existence, there are many more that investors can choose from besides. For example, some popular ones include:
S&P MidCap 400 | Russell 1000 | MSCI EAFE | MSCI Emerging Markets | Barclays Capital Aggregate Bond Index | FTSE NAREIT Mortgage REITS Total Return Indices.
Lastly, it’s important to note that while traditional index funds would be purchased by individual retail investors via a broker or financial advisor (either directly at their main brokerage account or through a mutual fund company), ETFs also started appearing during this time–which could be bought and sold like stocks on organized exchanges. ETFs have now become one of the most popular forms of
What are ETFs and how do they differ from index funds?
ETF stands for exchange-traded funds, more commonly called ETFs. While both index funds and ETF vehicles are essentially trying to track their respective markets by owning all the securities that make it up in proportion with how large they are, ETFs have several key differences.
First and foremost, instead of being directly purchased from a mutual fund company or brokerage account like index funds, you can buy them on an exchange–like stocks. This means no middleman is involved in the transaction (as would be there for traditional index funds) which also allows investors to trade throughout any given day at whatever price is available rather than having specific end-of-day closing prices.
Secondly, they tend to cost less money overall when compared to mutual funds because most ETF companies do not charge annual management fees. There may still be commissions charged for buying and selling shares but it’s usually a fraction of what you’d pay for most other investments as well.
Lastly, ETFs track many different segments of the market and there are literally thousands of different ETF options. They track everything including but not limited to commodities, bonds, mutual funds, options, and stocks. More passive investors may want to consider building a diversified portfolio of low fee ETFs.
Here is an example ETF portfolio:
Lastly, two important things to note about ETFs vs traditional index funds are that the former will always be more volatile than the latter since they’re bought and sold like stocks. This means you can easily lose money very fast if done wrong–especially during times of panic selling (which is why many people prefer to use ETFs for active trading rather than long-term
What are index funds? Investment vehicles that seek to track the performance of a stock market index What are some examples of index funds? While the S&P 500 Index and Dow Jones Industrial Average are two
What are mutual funds and how do they differ from index funds?
Mutual Funds are an important part of the U.S. financial system. Mutual funds are a type of fund that invests in different stocks, bonds, or other investments to create a single investment customer. Mutual funds are issued by regulated investment companies and are managed by professional investors who maintain investment portfolios for multiple investors or retirement accounts.
Mutual funds are available either with a guaranteed return or no-load funds that have no upfront fee. The most common types of mutual funds include money market, bond, equity, and hybrid fund types. They enable people with limited resources to diversify their investments with professionally managed assets.
Mutual funds are typically more actively managed than ETF’s but also will usually come with higher fees. Be sure to check the fees of mutual funds and the history of performance by the fund manager. These can both be very important indicators for future success.
How do you invest in index funds?
You can buy index funds from a financial company or brokerage, through an online broker, or directly from a mutual fund company. You can invest in them by contributing to your 401K, IRA, or self-directed brokerage account. If you get an employer-matched contribution, this is like getting free money. You can also make your own index fund using ETFs if you understand the basics of how it works and have a brokerage account to invest in them with.
What are the costs associated with index funds?
There are no annual management fees or brokerage commissions associated with index funds. The only cost you’ll pay is the price of buying and selling shares in your account (which will be significantly lower than what you’d pay for almost any other type of investment), but that fee varies depending on which company made it. You can also invest through a self-directed IRA where there may not even be trade fees, just like
Summarizing Index Funds
In conclusion, there are many benefits to