Index funds represented a revolution in investing because they gave investors a chance to track the market's performance without having to rely on a portfolio manager to actively pick stocks and bonds.
Index funds are typically less expensive than actively managed funds.
Because they seek to track market benchmarks, like the S&P 500 Index, index funds tend to own more stocks or bonds than actively managed funds.
Index funds generally have lower taxable distributions than active funds.
An index fund's strategy is crystal clear. The fund is trying to track the performance of a market benchmark.
Over time, the benefits of indexing have translated into a historical performance edge. For example, the combined average annual return for stock and bond index funds was 8.7% versus 6.7% for actively managed stock and bond funds in the 20-year period ended December 31, 2010, according to data from Lipper, Inc.
We investors as a group make up the market, so as a group we earn, before expenses, whatever return the market provides. Some investors can outperform the market, but they have to be balanced out by other investors who underperform—a majority can't be above average.
When the costs of investing get factored in, the average investor earns less than the market rate of return. So minimizing costs is paramount.
Actively managed funds can have high overhead because they need to employ managers and analysts to decide what to buy and sell. These expenses cut into the fund shareholders' return.
Index funds have costs too, but typically they're much lower. Transaction costs, for example, are minimal because of relatively low turnover in the funds' holdings. The bottom line is that index funds' low costs allow you to keep more of the market's return.
In 35 years of indexing, we've honed a strategy for selecting indexes that we believe best represent the target markets. We then seek to track the indexes as closely as possible. Watch the videos below to learn more about how we apply our experience and knowledge to the management of stock and bond index funds.
All investments are subject to risks. Investments in bonds are subject to interest rate, credit, and inflation risk.
Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future returns.
The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.