Index Funds: Free Investing And Smart Money Moves

Index funds are a passive investment strategy that aims to mirror the performance of a particular stock market index, such as the S&P 500. By investing in an index fund, you can gain exposure to a diverse range of stocks with minimal fees, making it a popular choice for long-term investors.

Index funds are typically offered as either mutual funds or exchange-traded funds (ETFs). When choosing an index fund, it's important to consider factors such as the index being tracked, fund expenses, investment minimums, and the fund provider.

Some popular index funds with low fees include the Vanguard S&P 500 ETF, Fidelity ZERO Large Cap Index Fund, and iShares Core S&P 500 ETF.

By investing in index funds with low fees, you can maximize your returns over time, as more of your money is compounding in your investment account rather than being lost to fees.

Low-cost index funds vs. ETFs vs. mutual funds

Low-cost index funds, ETFs, and mutual funds are all great ways to invest in a diversified fund without a steep price tag. They each have their own unique features, benefits, and drawbacks. Here is a comparison of the three:

Low-Cost Index Funds

Low-cost index funds are a great way to invest in a diversified portfolio of stocks, bonds, or other securities. They are designed to track a specific market index, such as the S&P 500, and provide excellent returns at a low fee. These funds are passively managed, meaning they aim to replicate the performance of the index without active management. This results in lower fees for investors. Some examples of top-rated low-cost index funds include Fidelity Total Market Index, Vanguard Total Stock Market Index Fund Admiral Shares, and iShares Core U.S. Aggregate Bond ETF.

Exchange-Traded Funds (ETFs)

ETFs are similar to index funds in that they also track a specific market index. ETFs can be bought and sold on a stock exchange, just like individual stocks, making them more flexible and liquid than index funds. They often have lower investment minimums than mutual funds, and their prices fluctuate throughout the trading day. ETFs typically have lower expense ratios than mutual funds, and they are also more tax-efficient due to fewer taxable events. Examples of top-rated low-cost ETFs include Vanguard Total Stock Market ETF, iShares Core S&P 500 ETF, and SPDR Portfolio S&P 500 ETF.

Mutual Funds

Mutual funds are another type of investment fund that can be either actively or passively managed. They have higher investment minimums, typically requiring a flat dollar amount for the initial investment. Mutual funds are less flexible than ETFs because they can only be bought and sold once a day after the market closes. However, they offer simplicity and shareholder services that appeal to many retail investors. Mutual funds may also be more suitable for those who want to set up automatic investments or withdrawals. Examples of top-performing mutual funds include Vanguard 500 Index Fund Admiral Shares, Vanguard Total Stock Market Index Fund Admiral Shares, and Fidelity ZERO Large Cap Index.

In summary, all three options provide a diversified investment at a relatively low cost. Low-cost index funds are a good choice for those seeking a passive investment strategy and excellent returns. ETFs offer more flexibility and liquidity, while mutual funds provide simplicity and the option for automatic transactions. The choice between the three depends on the investor's preferences, investment goals, and investment style.

How to choose an index fund

Index funds are a great way to efficiently cover a market and they are often more tax-friendly than similar active funds. Here are some tips on how to choose the right index fund for you:

• Consider the fund's expenses: Compare the expenses of each fund you're considering. Sometimes a fund based on a similar index can charge much more than another.
• Taxes: Mutual funds tend to be less tax-efficient than ETFs. Mutual funds often pay a taxable capital gains distribution at the end of the year, while ETFs do not.
• Investment minimums: Many mutual funds have a minimum investment amount, often several thousand dollars. In contrast, many ETFs have no such rule, and your broker may even allow you to buy fractional shares with just a few dollars.
• Long-run performance: Track the long-term performance of the index fund (ideally at least five to ten years) to see what your potential future returns might be.
• Expense ratio: The expense ratio shows what you're paying for the fund's performance annually. For funds tracking the same index, it makes little sense to pay more than you have to.
• Trading costs: Some brokers offer very attractive prices when you're buying mutual funds. If you're going with an ETF, virtually all major online brokers now allow you to trade without a commission.
• Fund options: Not all brokers will offer all mutual funds, so see whether your broker offers a specific fund family. In contrast, ETFs are typically available at all brokers because they're all traded on an exchange.
• Convenience: It may be easier to go with a mutual fund that your broker offers on its platform rather than open a new brokerage account. But going with an ETF instead of a mutual fund may also allow you to sidestep this issue.
• Look at the index fund's traits: According to Morningstar analysts Ryan Jackson and Mo'ath Almahasneh, there are six traits to look for when evaluating index funds: representative, diversified, investable, transparent, sensible, and low turnover.
• Focus on the asset class: Morningstar's Jackson advises that instead of asking yourself, "Which index fund do I want?", ask yourself, "Which asset class do I want?". Since index funds are passively managed, they are tied to their asset class.
• Fees and expense ratios: Opt for the cheapest option. Vanguard's Admiral Shares mutual fund, for example, has a $3,000 minimum investment requirement but a low expense ratio of 0.04%.
• Check the index fund's weighting: Index funds are typically designed with either a market-cap weighting or an equal weighting. Market-cap-weighted funds give larger companies a greater impact, while equal-weighted funds give each index constituent or stock the same weighting in the portfolio.

Index fund diversification

Index funds are a type of mutual or exchange-traded fund (ETF) that tracks the performance of a market index, such as the S&P 500, by holding the same stocks or bonds or a representative sample of them. Index funds are defined as investments that mirror the performance of benchmarks like the S&P 500 by mimicking their makeup.

Index funds are attractive for several reasons, including diversification and low expense ratios. When you purchase shares of an index fund, you are exposed to all the stocks in an index. The idea is that stocks that are appreciating will make up for stocks that are depreciating. Index funds are passively managed, and they often have low expense ratios.

• Consider the geographic location of the investments. A broad index such as the S&P 500 or Nasdaq-100 owns American companies, while other index funds might focus on a narrower location (e.g., France) or a broader one (e.g., Asia-Pacific).
• Which market sector is the index fund investing in? Is it invested in pharma companies making new drugs or tech companies? Some funds specialize in certain industries and avoid others.
• What opportunity does the index fund present? Is the fund buying pharma companies because they’re making the next blockbuster drug or because they’re cash cows paying dividends? Some funds invest in high-yield stocks, while others want high-growth stocks.
• Compare the expenses of each fund you’re considering. Sometimes a fund based on a similar index can charge much more than another.
• For certain legal reasons, mutual funds tend to be less tax-efficient than ETFs. At the end of the year, many mutual funds pay a taxable capital gains distribution, while ETFs do not.
• Many mutual funds have a minimum investment amount for your first purchase, often several thousand dollars. In contrast, many ETFs have no such rule, and your broker may even allow you to buy fractional shares with just a few dollars.

Index fund fees

Index funds are a type of investment fund that tracks a specific collection of assets called an index. The index can include stocks, bonds, and other assets such as commodities like gold. The most well-known index is the Standard & Poor's 500 (S&P 500), which includes about 500 of the largest publicly traded American companies.

Index funds are available as either exchange-traded funds (ETFs) or mutual funds. ETFs tend to have lower investment minimums than mutual funds, which require a minimum amount of money to start investing in a fund. ETFs also tend to have slightly lower expense ratios.

When investing in index funds, it is important to consider the fund's expense ratio, which is the fee you pay to the fund company as a percentage of your investment. For example, an expense ratio of 0.06% means you pay $6 annually for every $10,000 invested. Lower expense ratios are better for investors as they result in higher returns on investments.

Sales loads, or commissions, are another cost associated with index funds, particularly mutual funds. These can be avoided by choosing funds from investor-friendly fund companies such as Vanguard, Charles Schwab, or Fidelity, which offer no-load funds.

• Fidelity ZERO Large Cap Index Fund (FNILX) - 0% expense ratio
• Vanguard S&P 500 ETF (VOO) - 0.03% expense ratio
• SPDR S&P 500 ETF Trust (SPY) - 0.095% expense ratio
• IShares Core S&P 500 ETF (IVV) - 0.03% expense ratio
• Schwab S&P 500 Index Fund (SWPPX) - 0.02% expense ratio

Index fund performance

Index funds are a passive investment strategy that tracks a stock market index, such as the S&P 500. The goal of index funds is to match the performance of the underlying index, rather than trying to outperform it. This means that index funds have lower costs than actively managed funds, as they do not require teams of analysts and portfolio managers.

Index funds have been incredibly hard to outperform. The latest S&P Versus Active (SPIVA) scorecard found that over the past 15 years, 88% of all U.S. large-cap funds have failed to beat the annualised returns of the S&P 500.

The performance of index funds depends on the index they are tracking. For example, the S&P 500 has delivered a compound average annual growth rate of 10.7% per year over the past 30 years. The performance of the S&P 500 in most years was far from its historical average, with returns well above or below this figure. However, the index delivered negative returns in only five of those years.

Some of the best-performing index funds include:

• Vanguard 500 Index Fund Admiral Shares (VFIAX)
• Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX)
• IShares MSCI World ETF (URTH)
• BNY Mellon U.S. Large Cap Core Equity ETF (BKLC)
• Vanguard Total Stock Market ETF (VTI)
• SPDR S&P 500 ETF Trust (SPY)
• IShares Core S&P 500 ETF (IVV)
• Fidelity ZERO Large Cap Index (FNILX)
• Vanguard S&P 500 ETF (VOO)

Frequently asked questions