INDEX FUNDS 2022
- WHAT IS AN INDEX FUND
- WHAT YOU SHOULD KNOW ABOUT AN INDEXED FUND (characteristics)
- DIFFERENCES BETWEEN INDEX FUNDS AND ETF
- WHAT DO WE CALL AN INDEX?
- TYPES OF INDICES
- ADVANTAGES AND DISADVANTAGES OF INDEX FUNDS
- MEDIUM AND LONG-TERM INDEX FUNDS
- ARE INDEX FUNDS SAFE?
- HOW TO INVEST IN INDEX FUNDS
WHAT IS AN INDEX FUND?
Have you ever imagined investing in a fully comprehensive index? The philosophy of this type of investment is that they do not try to beat the market, but follow it, thus flowing with it.
Index funds originated in 1975 when economist Bogle revolutionized the investment world by creating them. When Vanguard Group was created in May of that year, it implemented a novel ownership structure where shareholders became co-owners of the funds in which they invested.
As this philosophy was based on average investors, it would have trouble beating the market over the long term, forcing him to prioritize ways to reduce investment expenses, so he decided to focus on passive investing with low turnover and simple investment strategies.
When we talk about an index fund or index fund, we are referring to a type of fund made up of shares that represent a specific market index such as the Ibex35, the S&P500, or the Vanguard Global Stock Index Found.
This type of investment does not require the investor to intervene, but rather directly provides the option of generating a portfolio with various possibilities allowing for a medium and long-term return on savings, without the worry of individually purchasing securities in the same proportion.
Index funds help the investor to balance the risk of the investment portfolio so that the wild and volatile swings that are generated by managing the portfolio on an individual basis disappear and the trend is much less volatile.
WHAT YOU SHOULD KNOW ABOUT AN INDEX FUND (characteristics)
One of the best ways to currently buy indirectly in an entire market is by investing in index funds, whose main function is to buy stocks that make up an entire index. For example, if the index tracks an index such as the Ibex35, the fund will buy stocks listed on the Ibex35.
In the same way, the investor buys shares of the fund, the value of which reflects the gains and losses of the index in which it is listed.
They are bought through an asset manager, making them unlisted. The investor gets an idea of prices through the performance of the index and index funds and index funds as these usually match the NAV, being traded without a spread.
This is your investment focus if you are looking for flexibility in trading the market during trading, making the ETF able to meet your needs. If you are looking to be a long-term investor, the indexed fund is ideal, but if you are looking for short-term investment or trading, the ETF is the structure that will suit you best.
Index mutual funds are the perfect alternative for investors who are looking for long-term or even medium-term returns without investing too much time in the technical analysis involved in today's financial markets.
DIFFERENCES BETWEEN INDEX FUNDS AND ETF'S
|They are designed for different investors, so they are structured in different classes.||They work in a standard way, so it is easy and intuitive for any type of investor.|
|Depending on the class, they have different fees on a graduated basis, i.e. the smaller the investment, the lower the fee, and the larger the investment, the higher the fee.||The minimum holding is 1 ETF, being valued at any amount.|
|Index funds focus more on core exposures and tend to have a broader scope.||With only one class, the funds are traded with the same amount of participation.|
|They have a wide range and variety of funds, trying to offer tools or basic products in order to customize their portfolios.|
WHAT DO WE CALL AN INDEX?
The stock market index is made up of the largest companies in a country, selected under different criteria, and the average of the assets that compose it is the quoted price.
They help to measure the economic process and the technological evolution of society, as well as being a great investment method.
TYPES OF INDEXES
There are currently two main types of index funds:
- The fixed-income index fund: This type of fund copies the composition of stock market indices.
- The equity index fund: This type of fund copies the composition of fixed-income indices.
World's largest stock market indices today
MSCI Emerging Markets
Dax 30 (Germany)
IBEX 35 (Spain)
FTSE 100 (United Kingdom)
CAC 40 (France)
FTSE MIB (Italy)
S&P 500, Nasdaq 100 (United States)
Dow Jones (United States)
Toronto Stock Exchange (Canada)
Nikkei 225 (Japón)
Índice Hang Seng (Hong Kong)
Índice SSE Composite (China)
BSE Sensex (India)
KOSPI (Corea del Sur).
Fixed income indices
|World Cup||Vanguard Global Bond Index Fund|
|European||Vanguard European Government Bond Index Fund|
|European||Vanguard Euro Investment Grade Bond Index Fund|
ADVANTAGES AND DISADVANTAGES OF INDEX FUNDS
|One of the main factors of passive investing is the savings in fees, as, unlike passive management, it does not require ongoing management, reducing the costs of index funds considerably.||One of its main disadvantages is its behavior, as it is directly proportional, if the index it replicates goes up, the fund will go up by about the same amount. However, if the index falls, the fund will suffer the same fall.|
|Investing directly in a specific index saves the investor time by buying an entire market rather than spending time studying stocks in detail.||The lack of geographical diversification is another disadvantage of index funds. Being exposed to such a complete market there is a high geographical risk. Therefore, we recommend that investors create a portfolio of different index funds in order to maintain a diversified exposure.|
|When investors decide to invest in an index fund, they have the enormous advantage of diversifying their capital, as they can invest in different stocks, while at the same time replicating the movement of a specific index.||Trading costs, as well as commissions, expenses, or tracking errors, can result in an index fund underperforming its index.|
MEDIUM AND LONG-TERM INDEX FUNDS
Indices will sooner or later trend upwards on the chart, but individual stocks oscillate more rapidly and with greater volatility. The index fund investor will not make a bullish profit during a bear market, but neither will he or she lose capital in a single investment that plunges as the market soars.
Index funds have lower account management fees (expense ratios) because they require less work than managed accounts.
For this reason, the investor will save on fees and get higher returns in the medium and long term.
In conclusion, index funds are aimed at people who have money that they will not need in a short period of time in order to invest it in the long or medium term.
COMMISSIONS INDEX FUNDS
It goes without saying that investing in index funds involves some form of fees, which are usually much lower than those of traditional funds.
These are the three main fees for index funds:
- Management fee: specific to each fund (charged internally, subtracting it from the net asset value), and/or to the entity that manages the fund's portfolios.
- Depositary fee: charged by the entity where the investor has his money deposited.
- Buying and selling commission: charged by the entity where the investor works to buy and sell index funds.
ARE INDEX FUNDS SAFE?
One of the main risks when investing in index funds is that the index that the investor is replicating has a negative trend. While we know that with this type of investment tool the probability of losing the money invested is quite low, and this is thanks to diversification, this simple detail is something that offers security to index funds.
Most funds are contracted in banks, which must be supervised by the relevant institutions and control bodies in each state. For example, in Spain, the Bank of Spain is the supervisory body and the Comisión Nacional del Mercado de Valores (CNMV) is the regulatory body. In addition, all index funds must be members of the Deposit Guarantee Fund (FDG).
The same applies if you decide to invest in a portfolio of index funds through automated fund managers. In these cases, they must also be regulated by a competent control, supervisory and regulatory body, depositing the money invested in other banks, which are, in turn, supervised by the security and supervisory body of the bank in question
HOW TO INVEST IN INDEX FUNDS?
1. CHOOSE AN INDEX
Today, there is a multitude of different indices around the world that investors can search using index funds. The most recognized index today is undoubtedly the S&P 500 index, which is made up of the largest companies in the US stock market, no more and no less than 500 companies. Below is a short list of the most popular indices by market:
- US LARGE STOCK MARKET: S&P 500, Nasdaq Composite, or Russell 2000.
- EUROPEAN STOCK MARKET: MSCI Europe
- WORLD STOCK MARKET COMPOSED OF 23 COUNTRIES: MSCI World
- PACIFIC EX-JAPAN LONG- AND MID-COVERAGE STOCK MARKET: MSCI Pacific Ex Japan
In addition to the indices mentioned above, we can find sectoral indices linked in particular to the industrial market, indices that focus on stocks in a specific country, indices that seek rapid growth, or even fixed income indices based on real estate (REAL STATE).
2. CHOOSE THE MOST SUITABLE FUND FOR THE INDEX
The next step will be to choose the index that best suits the investor, as a general rule we will find at least one fund that tracks it. For example, in the case of the S&P 500, we can find more than ten options, all tracking that index.
In the event that the investor has more than one option to choose from in his index fund, he should follow the 4 essential rules that we will inform you about below:
- Look for the fund that most closely tracks the performance of the index.
- Which fund has the lowest fees and costs?
- What limitations or restrictions the index fund in question may have.
- Find out if the fund provider owns other index funds for future interest.
3. BUYING SHARES IN INDEX FUNDS
The first option would be to set up a brokerage account where the investor can sell and buy shares of the index fund that suits him/her best. However, the other option would be to open an account directly with the mutual fund company offering the fund itself.
However, there are 2 ways to buy shares:
- INVESTING ON YOUR OWN
Nowadays, almost everywhere in the world, investors can invest in index funds.
This option is recommended for experienced investors who have some prior knowledge and, above all, have a clear idea of which index funds they want to invest in and the risk involved in managing their own profile.
- INVESTING WITH A ROBO ADVISOR
If, on the other hand, the investor is a beginner in this type of market and does not want complications, having a globally diversified portfolio of index funds, we recommend that a Robo advisor be the best option.
Current statistics are showing that it is the preferred option for those investors who want to make their savings profitable in the long or medium term without having to spend so much time on their portfolios. However, there is a fee for this type of tool, but it is definitely worth it.