There is a new post up at MoneyAhoy.com about investing in Market Index Funds and how it can be so beneficial to invest in these types of vehicles.
Market index funds can be Exchange Traded Funds (ETFs) or Mutual Funds. They are designed to hold a basket of stocks in direct proportion to the index they track. The most popular global index that is tracked which is largely representative of the US market in the Standard and Poor’s 500 (S&P500). Two of the most popular market index funds that track the S&P500 are the SPY and the VFINX.
The SPY is an ETF managed by SPDR (State Street Global Advisors), and it is one of the most actively traded ETFs in the world. The most current net expense ratio is only 0.0945%. This compares to the average actively managed mutual fund with an expense ratio of 1.29%!!
The VFINX is a mutual fund managed by Vanguard, and it is one of the most popular mutual fund index funds. The most current expense ratio for this on is 0.17%. The Vanguard website declares that this is 85% lower than most other funds with similar holdings.
There are several other benefits of investing in Market Index funds besides just the savings you will see from the lower expense ratios. The post at MoneyAhoy.com details several of these, so I will just touch on them here to wet your appetite:
- Cost – I touched on this above, so I won’t go into much detail here other than to point out that you will probably save on average roughtly 1.1% over actively managed mutual funds.
- Risk – Buying a diversified basket of stocks versus putting all your eggs in one basket is the most prudent way to go unless you are looking to buy lottery tickets! Believe me, I have made the mistake of only owning a handful of stocks and one bad pick can spoil the whole portfolio.
- Performance – Only about 20% of actively managed mutual funds beat the market index like the S&P500 each year. If you try to consistently find that 20% that will win each year over a 10-year period, it will be almost impossible for you to beat it. The much more likely scenario is that you will waste a lot of your time and come out behind.
- Simplicity – Each month or quarter you can simply fire up your investment software and purchase SPY or VFINX in about 3 minutes versus spending countless hours trying to pick the best stock you think will outperform.