Index Fund/ETF 101

When most people think of investing they think about individual stocks in companies such as Google or Amazon. In addition to individual stocks, people can invest in index funds. Index funds are a type of investment that mimics a specific index in the stock market. There are a variety of different indexes in the stock market today. One of the most common indexes would be the Standard and Poor’s 500 ( S&P 500), which is an index that represents 500 of the largest companies in the United States based on Market Capitalization . So, if I purchased an S&P 500 index fund, I would own a small percentage of the 500 companies in that index. The size of the company ultimately determines the percentage that it holds in the index.

Index Funds VS. ETFs

Exchange-Traded Funds (ETFs) are similar to index funds in terms of tracking a specific index, but are different in several ways. Index funds are priced/traded at the end of the day based on their Net Asset Value (NAV), while ETFs are priced/ traded throughout the day like an individual stock. There can also be different costs involved with index funds like minimum amounts of money required for an investment in the fund. 

Index Fund Criteria 

When looking at different index funds it is important to look at what the index tracks, the costs of investing in that fund, and what you are trying to gain from the investment. There are a variety of indexes that track different parts of different markets. You may want to invest in the whole stock market, the whole bond market, or just a specific portion. Each fund has costs associated with investing money with the fund so be sure to look out for the fund’s expense ratio and any other fees that can be found on the fund website. An expense ratio is a fee that the fund’s managers charge based on the money you invest. For example, if you invest $1,000 in an S&P 500 index fund and the expense ratio is .03%, you will pay 30 cents in fees. You should be able to find funds with expense ratios around .1% or less but the average expense ratio varies by the type of fund. Lastly, it is important to know what outcome you want when looking at different investment opportunities. You may want to generate money quickly, over time, or combination of both. Index funds usually generate money slowly over time with average rates of return around 6-8%. It is important to note that is an average rate meaning it could be less or higher depending on the year.

How can I get started?

Brokerage accounts are a way for you to deposit money and invest in index funds and ETFs. Some common brokerage firms are Charles Schwab, TD Ameritrade, and E*TRADE. Robinhood is an online trading platform that allows you purchase stocks and ETFS but not index funds. Make sure to understand what fees you are subject to paying before opening an account!

Overall, index funds are a solid way to start investing because it can provide diversification with the stocks you own for low costs and maintenance. Below is a list of a few indexes that should help with searching for index funds. Good luck investing!

U.S. Stock Market 

Wilshire 5000 (total stock market)

S&P 500 (500 largest by market cap)

Dow Jones  (30 stocks)

International Stock Market 

MSCI EAFE (over 900 stocks in Europe, Australia, and Far East)

MSCI ACWI (All Country World Index, around 2,700 stocks)

Bond market 

Bloomberg Barclays U.S. Aggregate Bond Index

Bloomberg Barclays U.S. Treasury Index

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