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What is an Index Fund?

IndexTo describe an Index Fund I’ll use the classic Vanguard 500 Index fund, symbol VFINX.

The VFINX fund is made up of stock in the 500 companies that the S&P 500 tracks. You would own a piece of all the 500 companies in the S&P 500. 🙂

The S&P stands for Standard and Poor’s. Standard and Poor’s is the leading provider of financial market information.

The S&P 500 is a leading benchmark for how the markets are doing. Many funds are compared to the S&P 500 performance. The 500 companies performance.

So if we take a look at the chart from Morningstar below, we can see that red, orange and green lines are stacked on top of one another. How in the heck can you see that if they’re stacked on one another!! Well, trust me. 🙂

The red line indicates the VFINX fund and its performance. The orange line indicates the category’s performance that the VFINX is in and the green line indicates the S&P 500 and its performance.

VFINX

This is a great fund that a lot of folks invest in and it resembles the latest talk amongst those folks who want to make their lives simple by investing in index funds.

Some reasons include:

  • The VFINX tracks the market, and we’ve been told that historically the market goes up. So if a person can hold the VFINX fund in their portfolio or as their only holding in their portfolio, and if they can stomach the downs of the market that we’ve been experiencing lately, then that is the promise. This fund will go up with the market and go down with the market. It will never do better than the market. In other words, it will NOT beat the market when the market goes up and it won’t try and lose less than the market when the market goes down. WOW!! What a mouth full.
  • The expenses related to the VFINX are extremely low. The fund manager basically doesn’t have to do too much. At Morningstar it’s listed as 0.18%. We’ll talk through the “Express Ratio” in another post. But that is one indicator to look at that will tell you how much it costs to run a fund and the VFINX is good and low.
  • The VFINX is considered tax efficient. Why? Because the fund manager doesn’t have to trade in and out of different investments that would cause a taxable event like selling a stock. There would be very little selling since the “makeup” of the fund doesn’t change often.

RelaxingThere is great power and trouble-free worry when it comes to owning the Vanguard 500 Index fund. Through the power of compounding over a long period of time this fund would do good for a lot of folks.

Of course, according to Morningstar it would cost you a minimum of $3,000.00 to get into this fund.

If it’s available to you in your employer’s retirement plan, you would most likely be able to get into this fund without the minimum. Check with your employer.

If you’re interested in holding the VFINX in your Roth IRA, you’re brokerage firm will list the minimum to get into this fund.

Disclaimer: Past performance is not a guarantee for future performance. Even owning this fund you are taking a bit of risk. The risk of the market.

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