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Taking A Closer Look At Index Funds

Mutual Fund Education

Taking A Closer Look At Index Funds

Daniel Cross Dec 08, 2015




Who Index Funds Are Designed For


One of the most popular index funds, the Vanguard 500 Index fund, is tied to the S&P 500 (as the name implies). While minimal changes are made as stocks are added or removed from the S&P 500 index, the index fund primarily seeks to mimic the performance of the S&P 500. As the broader averages rise and fall, the index fund will similarly perform. For an ETF that seeks to mimic this index, look no further than SPY or VOO.

This can lead to much higher volatility than other managed mutual funds but has a place in the right portfolio. Conservative investors who eschew risk, or are close to retirement, shouldn’t invest in an index fund—but less risk-adverse or young investors, who are still a decade or more away from retirement, might consider investing.

By mimicking an index such as the S&P 500, these funds offer investors one of the purest plays on the stock market. Since they are passively managed, index funds have very minimal expense ratios—often times under 0.10%. That makes them ideal for long-term growth strategies.

While the stock market as a whole can be volatile in the short term with significant changes on a daily, weekly, monthly and yearly basis, the overall direction of the market is positive. Looking back 30 years, the S&P 500 has gone up nearly 1,000%—that’s an average annual return of around 8.3%. Compared to the performance of mutual funds, an index fund is a hard bargain to beat considering that most mutual funds underperform this figure without considering the extra cost of an expense ratio factored in on top of it.


Bottom Line


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