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 in the US). 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, including 30 of the largest and most influential companies in America. So, if you invest in a Dow Jones fund, you will invest in a single fund that is invested in all of those companies.
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 the Russell 3000 index may be the best way to invest in the stock market as a whole.They are probably right since it contains so many companies.
Investing Options
There are so many options for index funds. I can’t name them all here, but here is a list of the major global ones. The most popular index to own is probably the S&P 500. It 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.
Lower Fees
Index fund fees are generally much lower than the fees of actively managed funds. An index fund is passively managed, so the manager doesn’t “manage” it by picking the stocks based on research. There are also generally few advertising and marketing fees.
The average fee for an index fund is around 0.3%. That’s generally more than 1 percentage point less than that of 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, can invest in a TSP (Thrift Savings Plan), which gives you several index funds to choose from. In an IRA or a regular taxable account, you can also invest in one through a brokerage company.
Index funds are a great core for retirement investing. They can also be used to save for big-ticket items. Just make sure you can devote several years (generally five or more) to the investment.