The Bottom Line
All you need for smart financial decisions
How and Why to Invest with Index Funds
Index Funds allow you to diversify into multiple stocks with just one purchase.
Diversification is the process of allocating capital in a way that reduces risk and exposure to any one investment.
You diversify when you do not "put all your eggs in one basket", or in this case invest all your money in one stock.
Investing with Index Funds is simple. Let's get started.
WHY INVEST VIA A STOCK MARKET INDEX FUND?
A stock market index offers broad exposure to a wide range of companies with one investment at a lower cost. To diversify on your own you would purchase stock in companies that are not correlated (think suntan lotion and umbrellas) in the right percentages.
WHAT IS A STOCK MARKET INDEX?
An index is a hypothetical basket of stocks. Indexes often represent the performance of a certain segment or sector of the overall market. In the United States, the three most popular benchmarks are: the S&P 500, NASDAQ, and Dow (Dow Jones Industrial Average).
HOW DO I INVEST IN AN INDEX?
As it is not possible to invest directly in an index, index funds were created to mirror the different indexes. Each fund’s performance is judged relative to its index or Benchmark.
HOW DO I CHOOSE BETWEEN INDEX FUNDS?
The easiest choice is a “total stock market” index fund. This type of index offers exposure to companies of all sizes across different industries.
Alternatively, you may choose a fund that compliments your existing investments or choose a fund that matches your interest, such as:
Technology or other industries
Big established companies or smaller growth companies
When comparing funds, consider:
Performance over time (10, 5 and 3 years)
Reputable issuer / fund family (such as Vanguard, Blackrock and Fidelity)
A short list of total stock market and other index funds follows to help you get started. Simply click on the Symbol to see detailed information for each fund.
SELECTED INDEX FUNDS (ETF)
This following list is not inclusive and is provided to make it easier for you to discover options. We are focused solely on your best interest, and therefore, we do not endorse or recommend any individual fund, stock or other investment.
Vanguard Total Stock Market ETF
Benchmark/Focus: Entire domestic stock market, blue chips, mid- and small-cap equities
Holdings: 22% technology, 15% financial, 14% healthcare, 11% Industrials
Benchmark/Focus: Dow Jones U.S. Total Stock Market Index
Holdings:70% large-cap (technology, financials, healthcare, consumer, industrials)
iShares Core S&P Total U.S. Stock Market
Focus /Benchmark: Total U.S. stock market
Holdings: 3,000 stocks representing ~90% of companies traded on U.S. stock exchanges
Vanguard S&P 500
Benchmark/Focus: S&P 500 Index
Holdings: Large-cap companies
SPDR S&P 500 ETF
Benchmark/Focus: S&P 500
Holdings: Large companies, such as Apple(APPL), JP Morgan Chase & Co. (JPM), Exxon Mobil Corp.(XOM)
Benchmark/Focus: The Russell 3000 Index
Holdings: 75% of large-cap companies
Schwab U.S. Large-Cap Growth ETF
Benchmark/Focus: Growth Stocks
Holdings: Growth stocks doesn’t mean small companies, it refers to companies with faster revenue and profit expansion than peers, such as Amazon.com (AMZN) and Facebook (FB).
Vanguard Small Cap ETF
Benchmark/Focus: Small-cap companies (<$4 billion in market capitalization)
Holdings: Smaller banks, retailers, like Burlington Stores Inc. (BURL) and utilities, like NRG Energy Inc. (NRG)
Benchmark/Focus: FTSE Global All Cap ex US Index
Holdings: 6,000 stocks of companies in developed and emerging markets outside the U.S.
Vanguard FTSE Developed Markets
Benchmark/Focus: International companies in developed markets only
Your best interest is our only concern. We do not endorse or recommend any individual investment product, investment strategy or financial product provider. All Information is provided to help you to easily understand your options and confidently take action to achieve your financial goals. The information is not intended to be, and shall not be construed to be individual investment advice.