Index Funds

2 minute read

|27 Jun 2024

Table of contents

1.
Index Funds
2.
How to identify the best index funds to invest in

Index Funds

Indexes - or indices - are collections of selected stocks or other investments. Some of the best known indexes include the S&P 500, which tracks the share price performance of the 500 largest companies listed on the US exchanges, or the ASX 200, which tracks the largest 200 companies listed in Australia. But there are also indexes that track sectors and industries, like technology or clean energy, as well as bonds, IPOs, currencies, growth stocks and more.

Index funds can be bought as either exchange-traded-funds (ETFs) or as mutual funds, but ETFs will almost always have lower costs and can be bought and sold on the CMC Markets Invest platform like any other share.

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Advantages of index funds

Diversification: Index funds allow you to add potentially hundreds of stocks to your portfolio in a single trade.

Mitigated risk: Because their goal is passively tracking an index rather than outperforming it, index funds are generally seen as a lower-risk investment.

Low-cost: As well as allowing you to pay brokerage on just one trade instead of money, index funds keep costs low. Index fund management feeds tend to be significantly lower than actively managed funds.

Disadvantages of index funds

The returns on high-performing stocks in your portfolio can be blunted by losses on your lower-performing stocks.

Some index funds can have tracking errors, meaning the fund's performance doesn't match that of the index it is tracking.

How to identify the best index funds to invest in

The two most important metrics of index funds are their performance and their costs.

Past performance is no guarantee of future success, but it does indicate recent market sentiment.

The costs of managing an index fund is captured in its expense ratio. For ETFs, these can be as low as 0.03% annually. This means that for every $10,000 invested, you would pay $3 in annual fees.

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