PrintIndex funds are mutual funds that mirror an index, such as the Standard & Poor's 500, The Dow Jones Industrial Index, or the NASDAQ. The idea behind an index fund is not to try to beat the market but to mimic the performance of an index.
By having a small piece of all, or nearly all, of the stocks in a particular index, there is less risk than there would be by selecting an actively managed mutual fund. In addition, another major plus of an index fund is that the expense ratio (cost of running the fund) will be lower than an actively managed mutual fund because there are very few transactions or management decisions to be made.
Index funds let an investor stick with a successful benchmark that everyone uses. An index fund mirroring the S&P 500, or another broad-based index, lets you be in various sectors and invest in both growth and value funds, giving you maximum diversification.
The choices can be overwhelming. You'll find index funds that mirror indexes focusing on small caps, mid caps, large caps, the global market, or social concerns. You will also find index funds that mirror bond or REITs indexes. Because the selection of index funds is so large, it helps to do some research or discuss such funds with a financial planner, broker, or someone you know who is knowledgeable about index funds. Indexfunds.com is a good place to start gathering more information.
Index funds can and often will outpace many of the managed funds during a bull market. In 1998, for example, some 80 percent of the funds designed to beat the S&P 500 did not succeed, making index funds a good choice. In a bear market, however, a good fund manager can be advantageous since the index fund will obviously drop. Of course, as is typically the case, over time, equities, equity funds, and the indexes can rebound, and in the long term such funds should be good investments.
The following are among the most significant indexes mirrored:
- The Dow Jones: The Dow Jones Industrial Average, which was invented by Charles Dow in 1896, is the most widely followed index in the world. Included are major companies such as General Electric and Exxon.
- The Nasdaq Composite: The NASDAQ is a heavily followed index that has a strong technology-oriented representation and includes companies such as Microsoft. A fund mirroring the NASDAQ 500 index will include all domestic and non-U.S.-based common stocks listed on the NASDAQ stock market. The index is capitalization-weighted.
- The Russell 3000 Index: The Russell 3000 Index represents more than 98 percent of the U.S. equities market. It is completely reconstituted each year to maintain an accurate picture of the market. An index fund mirroring the Russell 3000 covers a broad spectrum of equities.
Other significant indexes include the Russell 2000, the S&P 500, the NYSE Composite, the Fortune 500 Index, and the AMEX Composite.
