An index fund is a type of investment that monitors the performance of a market index, which is usually comprised of stocks or bonds. Index funds usually invest in all of the components that make up the index they monitor, and they have fund managers whose task it is to make sure the index fund matches the index’s output.
SELECT AN INDEX
Index funds can be used to track hundreds of different indices. The S&P 500 Index, which comprises 500 of the largest companies in the United States stock market, is the most common index. Here’s a quick rundown of some more common indexes, organized by market segment:
The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite are examples of large U.S. stocks.
Russell 2000 and S&P SmallCap 600 are two examples of small stocks in the United States. International stocks include MSCI EAFE, MSCI Emerging Markets and bonds include Bloomberg Barclays Global Aggregate Bond.
Aside from general indexes, there are sector indexes for specific sectors, country indexes for stocks in specific countries, style indexes for fast-growing companies or value-priced stocks, and other indexes that restrict their investments based on their own filtering systems.
CHOOSE THE RIGHT FUND FOR YOUR INDEX
When you’ve decided on an index, you’ll almost always be able to find at least one index fund that tracks it. You can have a dozen or more options for common indexes like the S&P 500, all of which track the same index.
You’ll want to ask some simple questions if you have more than one index fund option for your chosen index. First, which index fund closely monitors the index’s performance? Second, which index fund has the most cost-effective strategy? Third, does an index fund have any limits or constraints that prohibit you from investing in it? Finally, does the fund provider offer any other index funds that you’d like to try? The answers to those questions should make choosing the best index fund for you a lot easier. Finally, does the fund provider offer any other index funds that you’d like to try? The answers to those questions should make choosing the best index fund for you a lot easier.
BUY INDEX FUND SHARES
You may usually open an account directly with the mutual fund firm that provides the index fund to buy shares in it. You can also open a brokerage account with a broker that helps you to purchase and sell shares of the index fund you choose to invest in.
Again, consider costs and features when determining which method is best for you to purchase shares in your index fund. Some brokers charge extra for customers who want to purchase index fund stock, making it easier to open an account directly with the index fund firm. Many investors, however, tend to keep all of their assets in a single brokerage account. If you choose to invest in a variety of index funds from various fund managers, the brokerage option might be the best way to consolidate all of your assets into a single account.
