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An index fund is a fund that tracks an index, such as the S&P 500, the Nasdaq 100 or the Dow Jones (the 3 most popular American indexes). So what exactly is an index?
What is an Index?
An index is a representation of a portion of the stock market.
Example: The Dow Jones Index is comprised of 30 companies, these are 30 of the largest and most influential companies in America. So if you were to invest in a Dow Jones index fund, you would be able to invest in a single fund, but that single fund would be invested in all of the companies on the Dow Jones Index.
There are larger indexes, the largest among popular indexes probably being the Russell 3000 Index, which includes 3000 companies (as you may have guessed). Some believe that Russell 3000 index funds may be the best way to invest in the stock market as a whole and they are probably accurate, since it contains so many companies.
Index Fund Options
There are so many options for index funds, that I can’t name them all in a mini blog, but here is a list of the major global indexes. The most popular index as far as owning an index fund goes, is probably the S&P 500. This index includes basically all of the companies on the Dow Jones plus another 470 companies like Apple Inc. and Google Inc., to name a couple of the most popular right now.
Index Fund Fees
Index fund fees are generally much lower than the fees of actively-managed funds. An index fund is passively-managed, so the manager does not have to “manage” it by picking the stocks based on research and there are generally little advertising and marketing fees for index funds.
The average fee for an index fund is around 0.3%, which is generally more than 1 percentage point less than an actively-managed fund.
Buying an Index Fund
Many company retirement plans, such as a 401(k) or a 403(b) have index funds as an option for investment. The US Armed Forces, as well as many other government positions, have the option to invest in a TSP (Thrift Savings Plan), which gives you several index funds to choose from. You can also invest in an index fund through a brokerage company or financial institution in an IRA or a regular taxable account.
Index funds are a great core for your retirement investing and they can also be used to save for big ticket items, as long as you can devote several years (generally five or more) to the investment.
Open an IRA in 15 minutes or less with TD Ameritrade, where you can buy stocks, mutual funds, index funds and ETFs.