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{Listen to the audio of this section and be sure to review your workbook action items at the bottom of this page}

Now let's get into one of my favorite ways to invest - and that's in index funds!

As a refresher from lesson 6, an index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (Investopedia definition) and a stock market index is basically the measure of change of the value of the stock market or a segment of the stock market.
 

If you’ve been a part of the Clever Girl Finance tribe long enough, you’ve probably heard me talk about how much I love index funds. It’s essentially a relaxed investing strategy that millions of people leverage because it continues to prove that it’s a smart way to invest - even Warren Buffet loves index funds.
 

But I don’t want you to just take my word for it, so let’s get into the key benefits that make me such a huge fan of index funds.


Key benefits of index funds

 
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They are passively managed

As I’ve mentioned, Index funds (and ETFs) are set up to mimic specific indexes and this means because they are mimicking various indexes there is no need to for them to be actively managed by fund managers or other financial professionals who’s job it is to pick the holdings of the fund.


They are low cost

As a result of them being passively managed, they cost less to manage and have lower expense ratios which means as an investor, your potential for larger earnings are increased. Sometimes you might look at those expense percentages and think, we’ll it’s only 1% or it’s only 2% but in lesson 8, I gave the example of how if your portfolio reported a 10% performance return in the last year but you paid 1% in fees, then those fees and expenses would take away 10% of your earnings and profit - So expenses are a big deal.


They have solid returns

History and metrics show that when index funds and actively managed funds are compared, over 80% of the time, the index does better.
 

The offer great diversification

Because index funds are made up of hundreds and even thousands of funds and bonds (many times much more than actively managed funds), your investment is broadly diversified and this diversification helps to mitigate risk.
 

Taxes are easier to manage

When you buy or sell securities in the stock market, you are creating taxable transactions. With index funds you are buying and selling much less which means fewer taxable transactions and in turn also means a lower tax bill. (Note: You only pay taxes on any earnings you have, when you sell).


Popular index funds

A few examples of popular index funds include:

Vanguard Total Stock Market ETF (VTI)

  • The largest index ETF fund in the world (Large cap)
  • Highly diversified across the entire U.S. stock market (over 3,600 securities)
  • Expenses are 0.04 or $4 for every $10,000 invested (2018)
  • Average annual returns since inception in 2001, 7.18% (2018)

Learn more about this fund here.

 

Vanguard S&P 500 ETF (VOO)

  • Invests in stocks in the S&P 500 Index (Large cap)
  • Represents 500 of the largest U.S. companies.
  • Considered a gauge of overall U.S. stock returns
  • Expenses are 0.04 or  $4 for every $10,000 invested (2018)
  • Average annual returns since inception in 2010, 15.33% (2018)

Learn more about this fund here.

 

Vanguard Total World Stock ETF (VT)

  • Invests in both foreign and U.S. stocks. (Global)
  • Covers both well-established and still-developing markets.
  • Has high potential for growth, but also high risk
  • Expenses are 0.10 or  $10 for every $10,000 invested (2018)
  • Average annual returns since inception in 2008, 6.54% (2018)

 Learn more about this fund here.

 

Vanguard Total Bond Market (BND)

  • Provides broad exposure to U.S. investment grade bonds 
  • Keeps pace with U.S. bond market returns.
  • More conservative
  • Appropriate for diversifying the risks of stocks in a portfolio.
  • Expenses are 0.05 or  $5 for every $10,000 invested (2018)

Learn more about this fund here.

 

Here’s a full list of Vanguard most popular index fundsOther excellent non-vanguard fund examples include:

  • Schwab S&P 500 Index Fund (SWPPX)
  • Fidelity Spartan 500 Index Investor Shares (FUSEX)
  • T. Rowe Price Equity Index 500 Fund (PREIX)

Why does Vanguard dominate the list?

The founder of Vanguard and it’s former chairman, John C. Bogle, is credited with the creation of the first index fund available to individual investors and has been a proponent of and a major enabler of low-cost investing by individuals. (Wikipedia)
 

In other word, people love Vanguard index because they are the least expensive.
 

Note: Clever Girl Finance is not affiliated to these funds in anyway and neither do we earn commission for sharing them. The reason for sharing is solely based on popularity and reviews.


Extra credit

Head over to finance.google.com, finance.yahoo.com, morningstar.com or Nasdaq.com and look up each of these stock symbols to learn more about them and their historical performance.

Things to look for:

 
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  • When the fund was launched
  • What the fund invests in
  • The funds main objectives
  • The level of risk
  • The expense ratio of the fund
  • Average performance since it’s inception (or in the last 10 years)

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Take a stab at doing your own independent research in your workbook (located in the investing main menu) using the following pages: 

  • Stock & Fund Research