What are Indices and Index Funds?
An index is a collection of stocks that is so large and diverse that it can represent an entire segment of a particular financial market. Essentially, indices become benchmarks for how that particular segment is performing. Some of the most popular examples include the S&P 500 and the Nasdaq 100. Indices like these two can often indicate how the entire US stock market is doing.
An index fund contains much of the same stocks you’ll find in an index. If constructed properly, it will mirror the performance of the index almost exactly.
Usually, index funds are created by a fund manager, an investment bank or a brokerage. There’s very little managing required after the portfolio is set up. This is because all the fund manager has to do is replicate any changes that occur in the original index. In other words, a manager or broker will simply add and delete any stocks from time to time. As a result, index funds are much cheaper to manage than actively-managed types.
Why Do Investors Love Index Funds?
There are several benefits to choosing index funds over actively-managed ones. Here are the most important advantages:
When investing in a fund, you don’t just pay the value of the stocks. You also have to cover operational expenses such as taxes, bookkeeping fees and payments to managers. With actively-managed funds, operational expenses are quite high. This is because managers have to constantly analyze the stock market and pick the best performers. With index funds, the work involved is significantly less.
What Are Expense Ratios?
If you’re looking at index funds, you’ll come across the term ‘expense ratio’ quite often. Expense ratios tell you what percentage of your investment is take up by operational costs. With most low-cost index funds, you can expect an expense ratio between 0.2%-0.5%.
One thing that all financial advisors will tell you is to diversify your investments. This means buying stocks in a variety of industries rather one, allowing you to hedge potential losses. The best index funds contain stocks from hundreds of vastly different companies.
Low Risk and Decent Yields
Index funds are one of the safest investment instruments. Thanks to the huge amount of diversification in stocks, you don’t have to worry about the performance of each individual one.
The best index funds give out decent returns over longer periods of time. This makes them quite ideal for retirement accounts in particular.
The Best S&P Index Funds Right Now
- Vanguard S&P 500 ETF
- Fidelity ZERO Large Cap Index
- Schwab S&P 500 Index Fund
- SPDR S&P 500 ETF Trust
- iShares Core S&P 500 ETF
Vanguard S&P 500
The Vanguard S&P 500, created back in 2010, is one of the largest index funds in the securities market. Its complete list of assets is valued at $119 billion currently. The fund’s holdings include shares from some of the world’s largest companies, such as Apple Inc., Amazon Inc., and Microsoft Corp. The Vanguard S&P 500 is a capitalization-weighted index. This means that its largest holdings will have the greatest impact on the overall performance.
This index fund has a very low expense ratio of 0.04%. This means that for every $10K you invest, you’ll only pay $4 in management fees.
Fidelity ZERO Large Cap Index
This index fund actually mirrors the Fidelity US Large Cap Index but the difference between it and the S&P 500 is nominal. The biggest difference is that Fidelity doesn’t have to pay a fee to include ‘S&P 500’ in the fund’s name. As a result, Fidelity is able to bring down the expense ratio to 0%. Hence the ‘ZERO’ in its name.
Schwab S&P 500 Index Fund
The Schwab S&P 500 is actually one of the smaller funds on this list, with assets totaling $39 billion. But what it lacks in asset value, it more than makes up for in reliability. This index fund was created way back in 1997 and has been performing strongly ever since. It’s also endorsed by Charkes Swab: one of the most trusted brokerage firms in the US. The Schwab S&P 500 also offers an incredibly low expense ratio of 0.02%. So for each $10,000 that you invest in the fund, you’ll only pay $2 in operation costs.
SPDR S&P 500 ETF Trust
Created in 1993, the PDR S&P 500 is the oldest index fund on this list. It was a highly influential fund too, helping to popularize ETFs back in the day. This index fund is actually the largest in the world currently, with assets worth $262 billion in total.
Even with such a high-valued portfolio, the PDR S&P 500’s expense ratio is quite reasonable. At 0.09%, you’ll only have to pay $9 for every $10,000 buy-in.
iShares Core S&P 500 ETF
The iShares Core S&P 500 is the second-largest index fund on this list, with assets worth $182 billion. It’s also the second-biggest ETF in the world. The iShares Core S&P 500 is backed by the world’s largest fund company, Blackrock. Hence it’s also one of the most reliable index funds to invest in.
Like the Vanguard S&P 500 ETF, this index fund’s expense ratio is 0.04. For every $10,000 you invest in its holdings, you’ll spend just $4 in operational costs.
How to invest in an Index Fund
You can either buy an index fund from the mutual fund company itself or from a broker. We’d recommend using a broker like eToro when buying index funds. This is because brokers offer a wider selection. Usually, mutual fund companies will only carry funds that they’ve created. Some may carry competing funds as well but the selection is typically limited. Brokers like eToro, on the other hand, will carry index funds from a variety of companies across all industries.
Buying Index Funds through eToro
With eToro, you can open up both long and short positions. We recommend going for the latter because you’ll pay fewer fees and will stand a better chance of making decent returns. The platform currently offers 58 different ETF index funds that you can invest in.
eToro is quite easy to use, even for first-time traders. Features like ‘CopyCat’ helps amateur traders follow more experienced people until they get a feel for trading. Robinhood is a great alternative to eToro. It offers access to a wide variety of markets and instruments. In addition, it’s a commission-free platform, meaning you don’t pay any trading fees. Instead, you share the spread of profits with Robinhood.
Index funds are a great way to get into investing. They’re cheap to buy and are one of the lowest-risk investment instruments out there. The best index funds mimic the movement of the largest and most diverse portfolios like the S&P 500.