See the answers to your questions about Index fund investing. Getty Images
Do you have questions about index investing? What is an index? What are the benefits of investing in index funds? Which are the best index funds? What are common mistakes made with index funds?
The answers to what you want to know (and what you never thought to ask) about how to invest with index funds are all here. Reviewing frequently asked questions (FAQ) about index investing can help both beginners and experienced investors understand the basics about index funds and also how to learn new things for greater investing success.
For your convenience and further reference, each question has a hyperlink to more information for more depth and greater understanding to the answer to the question. If you want to read more, simply hover over the question and click the link !
What is an Index and what are some examples? An index, with regard to investing, is a statistical sampling of securities which combine to represent a defined segment of the market. For example, the S&P 500 Index is a sampling of approximately 500 large capitalization stocks. The index itself is not an investment; indexes (or indices) are created to use as reference points or benchmarks to gauge a particular segment of the market. Investors and portfolio managers can compare the performance of their own investment portfolios against an index, with the hopes of outperforming the index. Many mutual fund companies create index funds to mimic the performance of a particular index. Examples of other indexes include The Wilshire 5000 and the Russell 3000. both of which have been called total stock market indexes, The Russell 2000. which represents small-cap stocks, The Barclays Capital Aggregate Bond Index. which is a total bond market index, and various forms of The MSCI Indices. which represent international stocks.
What is the Dow Jones and how do investors use it? The Dow Jones Industrial Average is an index that represents the average price movement of 30 large companies from various industries in the United States. Named after Charles Dow and Edward Jones, the famous stock benchmark is also known as Dow Jones, the Dow 30 or as it is most often called, the Dow. Perhaps because of its recognizable name, evening newscasts and widely read print media can simply provide a headline, such as The Dow Hits Record Highs and consumers of information will know what that means. However, the Dow is primarily for reference. While most serious minded investors may respect its psychological headline impact, the Dow’s use as an investment vehicle is not commonly sought because of its narrow exposure to such a small amount of stocks.
Why do index funds beat actively-managed funds? The answer to this question can be answered with a few follow-up questions: If everyone wants to beat the index, why not simply invest in an index fund? Can it be wise to play ‘not to lose’ to the market rather than playing to win and increase risk of losing? There are many specific reasons to invest in index funds. One primary reason for investing in index funds is that they are passively managed. which means that the fund manager is not actively trying to beat the market or any particular segment of the market; they only seek to match the index performance (or come close to matching it after expenses). This passive management yields other reasons or advantages to investing in index funds, such as low expense ratios and tax-efficiency. Due to these advantages, and over over long periods of time, such as 10 years or more, index funds often outperform the majority of actively-managed funds.
Which Are the Best S&P 500 Index Funds? Index funds can be a wise choice for most investors and the most widely used index funds are those that replicate the S&P 500 Index. But which are the best? S&P 500 funds are generally identical in that they all invest in approximately 500 of the largest US companies, measured by market capitalization. Therefore the best S&P 500 index funds, such as Vanguard 500 Index (VFINX), Fidelity Spartan 500 Index (FUSEX) and Schwab S&P 500 Index(SWPPX), are those with the lowest expense ratios .
What are ‘total stock market index’ funds and which are the best? Indexes that are said to capture the total stock market include The Wilshire 5000 Index and The Russell 3000 Index. which respectively represent approximately 5000 and 3000 US stocks. Index funds that do a good job of replicating these indexes, while keeping the crucial expense ratios low, include Vanguard Total Stock Market Index (VTSMX), Schwab Total Stock Market Index (SWTSX) and iShares Russell 3000 Index (IWV), which is an Exchange Traded Fund (ETF) .
Which is best: A Total Stock Market Index Fund or an S&P 500 Index Fund? The total stock market index funds that seek to replicate these indexes offer investors broad exposure to large-cap stocks, mid-cap stocks and small-cap stocks. However, investors should not assume that bigger is better in terms of diversification. Because these total stock market index funds are market weighted, which means the large-cap stocks comprise a majority of the index, the performance is almost identical (see R-squared ) to the S&P 500 index. In other words, an investor may be better off using one of the best S&P 500 Index Funds and then build around this core with different fund categories for true total stock market representation.
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
