Index Funds - ETF Investing

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Index Fund Investments

Index Funds-Riding the Wave of the Market
By Barry Preusz

Index funds are investment funds that attempt to emulate the growth of an existing stock market index. These funds are usually constituted by the top funds within the market sector that index tracks. Investing in an index fund is passive investing. An index fund investor rides the wave of the market. As the wave of the stock market index goes up, so does the index fund. Conversely, as the stock market index wave goes down, so does the value of the index fund.

Index Funds and ETF’s

Professional financial managers do not guide these types of funds. Individual stocks that make up the index fund come from a random bucket of large, seasoned public company stocks. Index funds usually focus on a broad indicator like the Dow Jones Industrial Average or a sector of the market such as gold, energy, utilities, large public companies or small public companies. Since 1993, index funds have been closely associated with ETF’s or Exchange Traded Funds. ETF’s possess high liquidity and can be traded on the markets like common stocks.

Top Ten Index Funds

Index Fund Investment Summary

Index Fund Investment Advantages

High Liquidity—Investors can purchase or sell index funds at any time during market hours.
Unmanaged Fund—Some investment wizards argue that unmanaged funds are an advantage since historically the performance of managed funds is less than the S&P 500 index.
Reduced Fund Expense—An unmanaged fund usually extracts less annual fees from the shareholders income.
Reduced Risk—Although similar to owning stock, the risk of owning an index fund is spread over many stocks from large, developed corporations. Should one stock within the index take a sudden loss in value, there are many other stocks that also constitute the index still in support. Not all of the investors’ eggs are in one basket.
Reduced Abuse—Index funds are largely immune to market-timing abuses and price manipulations associated with mutual funds.
Sell Short—Index funds have the flexibility of selling short. This strategy comes into play when investors feel that prices may fall. Index funds can be sold short without being subject to marketing conditions or the up-tick rule of the exchanges.
Margin—Index funds can be purchased on margin.
Tax Efficiency—In many cases index funds incur less tax expenses due to the SEC regulations that govern them. However, if the investor is working through a non-taxable account, the tax efficiency is similar to mutual funds.

Index Fund Investment Disadvantages

Commissions—Investors must pay broker commissions when purchasing and selling index funds.
Returns—For the most part, index funds fail to take advantage of smaller stocks that can produce higher returns.