Index Funds and Individual ETFs
We’ve covered actively-traded Mutual Funds, but what about passively-traded Mutual Funds? Index Funds, also known as Passive Mutual Funds or Indexed Mutual Funds, are the lower-cost alternative to actively-traded Mutual Funds.
An Index in the stock market simply tracks the ups and downs of a chosen group of stocks and/or bonds. An Index acts as a representation of how a larger market is doing overall. It’s similar to how housing prices are tracked- when a city reports its average house price, they’re not actually looking at the price of every single home in the city. Instead, they’re looking at a group of houses that is meant to represent the full city.
There are many different stock market indexes, such as the S&P 500 Index in the United States, which tracks the 500 largest & most stable companies in the US, or the TSX60 Index in Canada, which tracks the 60 largest & most stable companies in Canada.
The goal of an Index Fund is to match the performance of an Index as closely as possible. Index funds are popular among investors who prefer to take a more hands-off approach to investing and are more focused on long-term growth to build up m. And because an index fund gives you access to all the stocks within a single market, you’ve got diversification built right in.
An Exchange Traded Fund (ETF) is
Companies that create ETFs often use stock market Indexes to guide which stocks and/or bonds should go in the ETF.
ETF vs Index Fund (Canada vs US, when and how to buy them)
Unlike Mutual Funds, which are completely hands-free, investing in Index Funds and ETFs do require you to put in a bit of work… “using a Direct Investing platform”.
One of the big pros of index funds: low costs. Because they mirror the market they’re picked from, index funds don't require a super-involved manager who’s constantly trying to stay ahead of the market, selling and picking new stocks: the stocks have already been picked out for you by the market. There are also lower transaction costs, because you’re not picking, choosing, and trading individual stocks from within the market. Maintaining a portfolio of index funds will usually run you 0.05% to 0.25% annually, while actively managed funds can charge 1% to 2%.
Pros:
Cons:
You don’t get to have control over individual holdings
You have to research & purchase these yourself
