Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification and lower risk – usually all for a minimal expense. That’s the reason many investors, especially beginners, find index funds to be superior investments to individual stocks.
Some of the most watched indexes top off the financial news each evening, whether it’s the Standard and Poor’s 500 (S&P 500), the Nasdaq Composite, or the Dow Jones Industrial Average. These indexes are often shorthand for the performance of the market, and investors track them to make sense of how stocks in general are faring.
Here’s everything you really want to be familiar with index funds, including ten of the top ones to consider adding to your portfolio this year.
Index funds based on major indexes are popular for many reasons. These funds offer a decent return over the long haul, they’re diversified and a relatively generally safe way to invest in stocks.
Attractive returns – Like all stocks, major indexes will fluctuate. Yet, over the long haul indexes have made solid returns, such as the S&P 500’s drawn out record of about 10% annually. That doesn’t mean index funds make cash consistently, yet throughout significant stretches of time that’s been the average return.
Diversification – Investors like index funds because they offer immediate diversification. With one purchase, investors can claim a wide swath of companies. One share of an index reserve based on the S&P 500 provides ownership in hundreds of companies, while a share of Nasdaq-100 asset offers exposure to about 100 companies.
Lower risk – Because they’re diversified, investing in an index reserve is lower risk than owning a couple of individual stocks. That doesn’t mean you can’t lose cash or that they’re as safe as a CD, for example, yet the index will usually fluctuate much less than an individual stock.
Minimal expense – Index funds can charge very little for these benefits, with a low expense ratio. For larger funds you may pay $3 to $10 each year for each $10,000 you have invested. In fact, one asset (listed above) charges you no expense ratio at all. With regards to index funds, cost is one of the most important factors in your total return.
While some funds such as S&P 500 or Nasdaq-100 index funds allow you to possess companies across industries, different funds own main a specific industry, country or in any event, investing style (say, profit stocks).