Should you invest in an Index Fund?

Should you invest in an Index Fund?

By Maurice Stouse

Last year, over $400 billion flowed into index mutual funds and exchange traded funds. Index mutual funds, like most exchanged traded funds (ETFs) are passive. They pick a basket of stocks or bonds and simply replicate the index it most closely matches, rarely buying or selling holdings.  The S&P 500 is one example of this. Money has flowed into index funds at a rate which has far exceeded the flows into actively managed mutual funds. So why the popularity and appetite for index investing?

The cost is lower (which can impact returns favorably) because the fund does not have management expenses for research, higher levels of trading, and individual or group fund managers to pay. Lower cost funds help you keep more of what you earn. Actively managed funds by contrast have managers that pick the stocks, or bonds for the fund. Research, administrative, sales trailers (12b-1) and other fees all combine to make up a fund’s expense ratio. The manager is usually an individual or team of individuals employed by the fund or fund company.  Cost alone however does not completely help you make a decision.

Performance of course is a significant factor. And yes, past performance does not indicate future results. It just so happens though that in the past five years, stock or equity index funds have outperformed over 80% of actively managed funds. That is why many investors today are taking a serious look at index funds.

Knowing what you own, why you own it, and what it costs you are significant considerations when investing for your goals, or to build your wealth and provide for your future. When it’s time to make decisions, all investors should work with their advisors, or do their own research, to ensure they are investing in line with their ultimate goal, time frame, and most importantly, their comfort level with risk.

Maurice Stouse is a Financial Advisor with Raymond James & Associates, Inc. 34851 Emerald Coast Pkwy., Suite 200, Destin, FL 32541. Raymond James & Associates, member New York Stock Exchange/SIPC. Phone 850.650.0990.

Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature, and is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results. There is no assurance these trends will continue or that forecasts mentioned will occur. Investing always involves risk and you may incur a profit or a loss. No investment strategy can guarantee success.