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How To Buy Low Cost Index Funds

An index fund is a passive investment that tracks the assets included in the index. The index fund does not actively invest in the market. Instead, it merely tries to match the performance of the index by holding the same assets in the same proportions as the index.

how to buy low cost index funds


You can buy low-cost index funds as either an ETF or a mutual fund, and well-known indexes such as the S&P 500 will have both available. The list above, for example, contains both kinds. (The three-letter ticker symbols are for ETFs, while the five-letter symbols are for mutual funds.)

These fund managers then mimic the index, creating a fund that looks as much as possible like the index, without actively managing the fund. Over time the index changes, as companies are added and removed, and the fund manager mechanically replicates those changes in the fund.

Some of the most watched indexes fill up the financial news every night and are often used as shorthand for the performance of the market, with investors tracking them to get a read on how stocks as a whole are faring.

While some funds such as S&P 500 or Nasdaq-100 index funds allow you to own companies across industries, other funds own only a specific industry, country or even investing style (say, dividend stocks).

The list below includes index funds from a variety of companies tracking a broadly diversified index, and it includes some of the lowest-cost funds you can buy and sell on the public markets. When it comes to index funds like these, one of the most important factors in your total return is cost. Included are three mutual funds and seven ETFs:

The Nasdaq-100 Index is another stock market index, but is not as diversified as the S&P 500 because of its large weighting in technology shares. These two funds track the largest non-financial companies in the index.

While the S&P 500 and Nasdaq are two of the most popular stock market indexes, there are many others that track different parts of the investment universe. These three index funds are also worth considering for your portfolio.

Your first step is finding what you want to invest in. While an S&P 500 index fund is the most popular index fund, they also exist for different industries, countries and even investment styles. So you need to consider what exactly you want to invest in and why it might hold opportunity:

ETFs have become more popular recently because they help investors avoid some of the higher fees associated with mutual funds. ETFs are also becoming popular because they offer other key advantages over mutual funds.

Index funds tend to be much cheaper than average funds. Compare the numbers above with the average stock mutual fund (on an asset-weighted basis), which charged 0.47 percent, or the average stock ETF, which charged 0.16 percent. While the ETF expense ratio is the same in each case, the cost for mutual funds generally is higher. Many mutual funds are not index funds, and they charge higher fees to pay the higher expenses of their investment management teams.

Index funds may be structured as exchange-traded funds (index ETFs). These products are essentially portfolios of stocks that are managed by a professional financial firm, in which each share represents a small ownership stake in the entire portfolio. For index funds, the goal of the financial firm is not to outperform the underlying index but simply to match its performance. If, for example, a particular stock makes up 1% of the index, then the firm managing the index fund will seek to mimic that same composition by making 1% of its portfolio consist of that stock.

Index funds track portfolios composed of many stocks. As a result, investors benefit from the positive effects of diversification, such as increasing the expected return of the portfolio while minimizing the overall risk. While any individual stock may see its price drop steeply, if it is just a relatively small component of a larger index, it would not be as damaging.

Most experts agree that index funds are very good investments for long-term investors. They are low-cost options for obtaining a well-diversified portfolio that passively tracks an index. Be sure to compare different index funds or ETFs to be sure you are tracking the best index for your goals and at the lowest cost.

No one can pinpoint the exact date when it became clear that investing in index funds had won out over investing in active management, but Warren Buffett declaring it to be so was certainly a pivotal moment.

The bet was this: Over a 10-year period commencing January 1, 2008, and ending December 31, 2017, the S&P 500 would outperform a portfolio of five hedge funds of funds, when performance was measured on a basis net of fees, costs and expenses.

Buffett, who chose the Vanguard Index Fund as a proxy for the S&P 500, won by a landslide. The five fund of funds had an average return of only 36.3% net of fees over that ten-year period, while the S&P index fund had a return of 125.8%.

In his 2017 letter to shareholders, Buffett took note of the high fees of hedge fund managers and offered what he called a simple equation: "If Group A (active investors) and Group B (do-nothing investors) comprise the total investing universe, and B is destined to achieve average results before costs, so, too, must A. Whichever group has the lower costs will win."

His advice to investors: "When trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds."

Standard & Poor's has been tracking the record of active managers for more than 20 years. Their mid-year 2022 report indicates that when adjusted for fees and for funds dropping out due to poor performance, after five years 84% of large cap actively managed fund managers underperform their benchmark, and after 10 years 90% underperform.

Fidelity has been managing index funds for almost 30 years, and we currently offer 28 Fidelity equity, fixed income, and hybrid index mutual funds; 13 Fidelity Freedom Index Funds; and 21 Fidelity passive ETFs.

Low-cost index funds provide instant portfolios that might otherwise take years or even decades to build if you cobbled them together on a share-by-share basis. A single investment gives you an ownership stake in every company on whichever index your fund of choice tracks.

Traditional index funds are a type of mutual fund, and they typically have minimum buy-in requirements. Index funds from BlackRock, the largest investment firm in the world in terms of assets under management, require a minimum investment of $1,000. Vanguard, the largest issuer of mutual funds, requires a $2,500 to $3,000 minimum investment on its index mutual funds.

You can lose money with any investment, and index funds are no exception. Millions of portfolios contain index funds because their diverse holdings offer a hedge against risk, but those diverse holdings include stocks and other securities with potentially turbulent pricing.

The biggest index funds in the world track those indexes and others like them. Their investors, therefore, have shouldered 12-month losses that mirror the losses of their corresponding indices almost identically.

If you choose index fund ETFs, you can start investing with $100 or even $1 as long as you choose a no-fee brokerage that allows for partial-share investing. M1 Finance, Fidelity Investments and Interactive Brokers are among the most popular.

The following is a list of 10 index funds that trade as ETFs and offer wide market exposure and low expense ratios. If two funds had nearly identical holdings, the one with the lower expense ratio made the cut. When two had the same holdings and the same expense ratio, the fund with greater assets under management earned a place on the list.

The first half of the list covers the cheapest index funds for U.S.-based companies. Those looking to add exposure to international stocks should consider VXUS, which mirrors the performance of the FTSE Global All Cap ex US Index. It offers exposure to nearly 8,000 stocks in both developed and emerging countries.

An index fund is an investment vehicle designed to match the returns of a market index such as the S&P 500 by owning the same assets in the same proportions as the underlying gauge. Since most S&P 500 index funds will look pretty much the same under the hood, a key consideration in picking one is cost. Lower-cost funds mean less of your money is going toward covering fund expenses.

Since index funds are designed to track an underlying index, the funds' managers aren't actively deciding what to buy and sell. Instead, they just follow the benchmark's lead. They can be mutual funds or exchange-traded funds (ETFs), which are most common. Actively managed funds may use an index as a benchmark but the managers can deviate from the index's structure.

An index fund can also hold hundreds or even thousands of securities, making it an easy avenue for diversification. Remember, though, that diversification is about more than just the number of securities you own. The Russell 2000 may seem diversified with 2,000 companies, but if you own only those, you're still entirely invested in small US companies. To be truly diversified, you need to own a broad range of securities of differing sizes and types.

Index funds are also vulnerable to market swings. If the benchmark declines, your index fund will, too. In an actively managed fund, the manager may be able to mitigate some of this downside, but passively managed funds are beholden to the index.

Index funds have become increasingly popular investment vehicles. Consider that just two of the biggest, Vanguard's S&P 500 ETF (known by its ticker, VOO) and the SPDR S&P 500 ETF Trust, themselves have a combined market value of more than $1.2 trillion. The growth behind funds such as these is largely driven by their relatively low cost structure. The biggest measure of cost with funds is the expense ratio. This represents the percentage of fund assets that are used to cover operating costs. If a fund has a 1% expense ratio, this means 1% of the money you put in will go toward the fund's expenses rather than generating a return on your investment. 041b061a72


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