Choosing the Best Index Funds

An index fund is a type of mutual fund whose performance is directly linked to that of an underlying stock of bond index. An index is a collection of securities (such as stocks and bonds) used to gauge the performance of an entire business sector, industry, segment of the market, and even country. Examples of popular indexes that are widely known include the Standard & Poor’s or S&P 500, the Dow Jones Industrial Average, Moody’s Corporate Bond Index, and the Wilshire 5000 Index, one of the broadest measurements of stocks used in the stock market today. The purpose of the index fund is to allow individual investors to mimic the performance, in terms of market returns, of the underlying index without necessarily having to purchase shares or the components of the index individually. The top 3 index funds for you to consider include: Standard & Poor’s (S&P) Oil & Gas Equipment & Services exchange traded fund (ETF), Vanguard 500 Index Fund, and the Vanguard Telecommunications Services Index Fund.

Frequently Asked Questions ( 8 )   Add a Question

  1. How does an index fund work?
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    An index fund is a mutual fund, where individual investors purchase a percentage interest. The assets combined together are used to purchase shares of the underlying portfolio in proportion to their weighting in the index. Through active management of the fund, the fund management seeks to mirror (or exceed) the performance of the underlying index.

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  2. Do the investments in an index fund match exactly the underlying index?
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    Yes and no. The portfolio of the index fund is designed to mirror the underlying index’s performance because it is actively managed. Other techniques, such as strategies to minimize an investor’s loss exposure may cause the portfolio’s performance to slightly differ from that of the index.

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  3. How close is the performance of an index fund to the underlying index?
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    Index funds are designed to mirror the returns of their underlying index. This is not always precisely the case as the fund is also designed to minimize investor’s risk of loss of their principal value invested. This technique occurs through active management of the portfolio by an investment manager, who receives a fee as compensation for the performance of their duties.

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  4. Do investments in an index fund constitute ownership of the underlying index’s portfolio?
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    Generally an investor in an index fund invests in an interest in the portfolio of the fund’s underlying portfolio of stocks and bonds and other financial instruments. The shares of the portfolio are not registered in the name of any individual fund investor but in the name of the brokerage firm holding the securities on behalf of the fund and its shareholders.

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  5. What are the risks associated with investing in an index fund?
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    The largest risk associated with investing in an index fund, as with any type of investment, is the risk of the loss of some or all of the money invested. This is referred to as capital or principal risk. Additionally, an investment in a bond fund or one whose values are derived principally from the bond market may be subject to the loss of value due to changes in interest rates, which is referred to as interest rate risk.

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  6. What makes a top index fund the best?
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    The criteria for a top index fund is typically its performance, in terms of market return. Expressed as a percentage, it is the amount earned when comparing the value of the index fund from when you first invested money, less any fees you pay for either commissions or manager’s costs.

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  7. Do the rankings of index funds change?
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    Yes, the rankings of index funds will change frequently as changes occur in the market. Any performance based index fund is going to be subject to the whims of the underlying market and changes in valuation, based on market conditions. The changes in market conditions cannot be predicted or controlled but may be managed in order to prevent significant financial losses from occurring.

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  8. Where do I learn more about index funds?
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    Index funds, including exchange traded funds, are considered securities under the federal Securities Act of 1933, as well as the Investment Companies Act of 1940. These laws require that investors receive certain information concerning the risks associated with investing in these funds, including the possibility of the complete loss of the principal amount invested.

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