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Index funds are one of the easiest investment vehicles to invest in. The funds are already diversified and you can buy them by economy sector.
“When there are multiple solutions to a problem, choose the simplest one.” John C. Bogle
Some of these funds have historical good return. Because they are well diversified you don’t have to make too many decisions to buy and maintain them.
HOW INDEX FUNDS WORK
All index funds are not created equal. The major categories are stock funds, bond funds and mixed funds. There are sectors funds within the major categories of index funds. These funds are traded like stocks, you can buy and sell them during the day. Index funds are priced by the market.
These funds are easy to buy with a broker account at a brokerage house or a mutual fund company.
The cost to buy depends on your broker or mutual fund company. Some companies can have higher costs for trading and others have free to low costs.
Index funds make good investments for investors who need dividend income or diversification in their portfolios.
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INDEX FUND INVESTING – WHERE TO BUY THEM
You can buy index funds at most brokerages and traditional mutual fund companies. Vanguard, TD Ameritrade, Fidelity and Charles Shwab are some of them.
The differences among the brokerages are going to be realted to trading costs and also to administration fees. Trading costs are the cost to buy and to sell the fund. Administration fees are related to managing and maintaning the fund during the year.
For maximum return on your investment, you want to keep all costs down. The higher the costs the more they eat away from your invested money.
To decide where to open an account to invest on index funds, I recommend you go to a few of their webpages. Feel them out and see the list of funds available for purchases. Check out their ease of navigation and decide on your level of comfort. Also, call their customer service and ask questions.
It’s also important to check out the trading costs. The costs varies among the brokerages. Some of them are free to trade. However, free is not alway best, so you decide where you feel comfortable.
The operating fees are also very important to keep in mind. Normally, you want low funds operating fees. As a rule of thumb these fees should be about 1% or less per year (expense ration).
For me personally, the factors I used to chose Vanguard were; the low cost to maintain the funds, the selection of funds and very important the company’s reputation and it’s long history with individual investors. However, there are other very good brokerages and funds companies.
Index Fund Vs. Mutual Fund
Mutual funds are the traditional fund investments. Index funds became available later. They are very much alike, except for a few differences. Mutual funds are priced once a day, normally at the end of the business day. Index funds are priced like stocks throughout the day. Also, index funds’ fees tend to be lower than mutual funds fees.
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INDEX FUNDS INVESTING – WHAT TYPE OF FUNDS TO BUY
The main index fund available and very popular is the S&P 500. This is a widely held funds by instituional and individual investors. It is used as investment in retirement accounts. The S&P 500 tracks or mimic the public companies that are part of the S&P.
You probably want to diversify and consider other types of index funds. There are more than just the basic S&P 500. Use these features to start including or eliminating funds types.
Capitalization – Some funds offer different market size funds for small, mid or large cap investing. This refers too the size of the companies included in the fund.
Types of companies – Funds can be classified as value funds or growth funds, depending on the underlying companies. Some companies are perceived to be undervalued compared to their true value, these will be found on a value fund. Growth fund is one that expect the underlying companies to grow, offering price appreciation.
Type of industry – You have the options of inveting in index funds that are industry specific. For example, REITs for real estate, Technology funds, utilities index funds, corporate bonds are some of the industry specific.
Selecting your ideal index fund depends on your individual style, risk appetite and investing goals. Do you want dividend income, price appreciation, growth? Remember the cost to trade as well as the administrative costs of your selection. These will impact your annual return.
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ETF Specifics Attributes to Look for
Since most ETFs follow or mimic an index, a good place to start to evaluate them is against the index followed or the benchmark. These are the main attributes to look at when analyzing an ETF.
Expense ratio. This is expressed as a percentage and it represents the fees charged by the fund to do it’s job. Generally, you want a low expense ratio. Traditionally, less than 1% expense ratio is viewed as good and efficient.
Tracking differences – These are the differences in performance between the ETF and the index that is being tracked. Since ETFs are managed to mimic an index, there shouldn’t be a big difference in performance returns. If your ETFs is lagging the index, this may be indicative of mismanagement
Risks – ETFs are generally well structured, specially the ones from well established firms. However, nothing is guaranteed in the investment world. Look for signs of closing or going out of business, again if you invest with a well run and well established company, the risks are minimized.
To get you started on your way to selecting an index fund, here is a list from the Montley Fool Most Popular Index Funds for 2019.
- SPDR S&P 500 ETF. Focus: S&P 500. Expense ratio: 0.09%.
- Vanguard Total Stock Market ETF. Focus: Total U.S. market. Expense ratio: 0.04%.
- Vanguard Total World Stock ETF. Focus: Total world market. Expense ratio: 0.10%.
- Schwab U.S. Mid-Cap ETF. Focus: Mid-cap stocks. Expense ratio: 0.05%.
- iShares Core S&P Small-Cap ETF. Focus: Small-cap stocks. Expense ratio: 0.07%.
- Vanguard REIT Index Fund. Focus: Real estate investment trusts. Expense ratio: 0.26%.
- Vanguard Intermediate-Term Bond ETF. Focus: Intermediate-term bonds. Expense ratio: 0.07%.
- Schwab U.S. Aggregate Bond ETF. Focus: Total bond market. Expense ratio: 0.04%.
Some of my personal favorites from Vanguard are:
- Dividends Appreciation ETFs – Large Cap Stocks
- Small Cap ETF – Small Cap blend
- Energy ETF – Energy stocks
- Industrial ETF – Industrial stocks
- Utility ETF – Utilities stocks
ETFs are relatively safe investments and very liquid because they are traded on the major exchanges. Just like stocks, they move up or down and you can make or lose money on your investments. Do your homework, compare 2 or 3 brokerages and decide where you feel more comforatble investing your money.
Start investing as early and as often as you can. Invest even in small amounts. Take action now to take advantage of compound interests on your money and of dividends reinvestments. Do it while you have enthusiasm for investing. Index funds investing is one of the best way to grow a portfolio for the long term.