We have heard a lot about index funds, trackers and ETFs in recent years. These specific financial supports are experiencing a real boom. But what are index funds and how do they work?
An index fund is a financial vehicle designed to monitor and replicate the performance of a market index.A market index measures the evolution over time of one or more values.Some indices are calculated every minute, others once a week.
Why invest in an index fund?
Index funds simply replicate, or “track”, changes in their benchmark index. Without trying to do better. Here, we are talking about passive management.
The advantage of this passive management is that the costs are limited. They are generally less than 1%/year, compared to 1 to 3%/year (or even more) for actively managed funds.
While an index fund only seeks to keep pace with the movements of the underlying index, active management aims to beat the fund’s benchmark.
However, some studies have shown that active management of funds does little better than passive management over the long term.
For these various reasons, the net performance of index funds over time remains, often better than that of most actively managed funds. To invest in an index fund, we suggest you to turn to equity plan advisory services.
It is therefore entirely possible, and even advisable, to diversify your assets by including index funds in your portfolio. As long as the latter replicate the performance of indices that are weakly correlated with each other.
What distinguishes index funds from ETFs?
Those who want to invest in an index way can choose between ETFs and index funds. With both product categories it is possible to save costs and minimize risks. The choice of the most suitable instrument depends on the needs of the investor.
The index investments enjoy great popularity, mainly because they represent a possibility to diversify the portfolio in a simple way. Index funds and Exchange Traded Funds (ETFs) are considered less risky than direct investments in individual stocks, as they track a benchmark index and thus hedge a large number of stocks.
The worldwide universe of indices is very large. With index-reflecting investments, you can diversify your portfolios across all asset classes globally, all thanks to best investment services companies.
Indices exist not only for national markets, but also, for example, for individual sectors, for credit ratings (relating to bonds) or for groups of countries. They can be replicated in both index funds and ETFs. However, Index funds are not traded on an exchange
Perhaps the most important difference between ETFs and index funds is that ETFs, unlike index funds, are traded on the stock exchange. Investors can buy and sell ETFs at any time during trading hours. The price of the ETF changes over the course of the day in tandem with the benchmark index.
Index funds, on the other hand, are traded through the trusted bank or fund manager. Their price is fixed only once a day (at the close of the stock exchange). The price is given by the sum of the closing prices of the securities represented in the fund.
Most index funds can be traded every day. However, investors should keep an eye on the closing time for subscriptions or redemptions. And the hours can vary greatly depending on the bidder and the market. Some funds, for example for investments in emerging markets, must be subscribed on the previous day.