What are Index Funds?
Discover Index Fund Investing
Index funds are perfect for the buy-and-hold investor - the kind of person who likes to sit back and let their investment grow, rather than moving in and out of the market in an effort to beat the market.
What is an Index Fund?
Index funds are mutual funds that attempt to copy the performance of a stock market index. The most common index fund tries to track the S&P 500 by purchasing all 500 stocks using the same percentages as the index. Other indices that mutual funds try to copy include: Russell 2000, Wilshire 5000, MCSI-EAFE, Lehman-Brothers Aggregate Bond, and NASDAQ 100.
Index Funds Have Lower Fees
Index funds can be managed by a much smaller staff than an actively managed fund. Computers do most of the work, so there is no need to hire an expensive fund manager or research analysts.
Index funds can have expense ratios as low as 0.18%, while actively managed funds can have an expense ratios over 3.0%.
Index Funds Are Tax Efficient
One problem with mutual funds is that they are required by law to pay out capital gains each year ( See Capital Gains or Capital Punishment). Funds that trade more often don't have the tax advantages that index funds have. Index funds delay capital gains taxes because they hold on to the stock much longer, which means the money that would have been paid out in taxes can keep producing investment returns.
Index Funds Outperform
Over the long term, the S&P 500 beats the returns of 80% of actively managed funds (and that isn't even taking into account tax efficiency).
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