Index Investing Strategy | Mutual Funds and ETFs

The index investing strategy is one of the best ways to invest for the long term. I will first explain what it is then talk about all the advantages that come with this method of investing.

I will also define all the terms used in this context like index funds, actively managed funds, passively managed funds and what indices actually are. Then I will offer some index tips.

Then I will go on to explain the S&P 500 index fund and why it's a good place to start looking at an index investing strategy for your investments. I will also provide some companies that offer the S&P 500 as an index strategy, which is based on the composite index.

With the declining economy and many actively managed funds proving not to perform well, many people will turn to index fund investing, and many toward exchange traded funds (ETF).  I will explain more why these have become the best investments for many people.

The index investing strategy is just another good method of investing and should be considered in the context of your overall investing strategy. Diversification is key and index investing is a good way of diversifying any portfolio with a relatively safe and cheap form of investing.

Index funds are mutual funds or exchange traded funds (ETF) that follow a particular index, whether it's the Dow Jones Industrial Average or S&P 500. This is considered a very safe way of investing because the Dow Jones Industrial Average and the S&P 500 have historically grown steadily over time.

In index funds the money manages don't actively seek out companies that look like they have potential. Instead they let these indexes tell them what companies they should invest in and how much capital to invest in each one.

This is why these funds are called passively managed funds, because the money managers follow and already built composition of companies that have been preselected for them.

Management Fees and Expense Ratio

The fact that index funds are passively managed has an added benefit of it being cheap on the management fees. Managed funds by asset management companies have something called an expense ratio.

The expense ratio is calculated as a percentage of the value of the fund that goes to overhead and operational costs. So if a fund is valued at $100 million and the cost to manage that fund is $1 million, then the expense ratio is 1%.

Passively managed funds have a lot less expense ratios than actively managed funds for obvious reasons. So in addition to index funds being less riskier, it is involves a lower expense ratio, which equals lower management fees.

The management fee for an actively managed fund can be as high as 1-2% of the value of your stake in the fund. The fee for a passively managed fund like an exchange traded fund that follows an index can be as low as .1%.

It may not seem like a big difference, but when you're investing thousands of dollars and you're working with even good growth rates of 8-10% a year, a difference of 1.5% can make a huge difference in your bottom line return. The index investing strategy can potentially save you a small fortune in fees.

Many start out their index investing strategy with S&P 500 Index Funds, which are designed to track the companies that make up the index. The S&P 500 is a composite stock price of 500 large publicly traded companies.

The 500 companies that are included in the S&P 500 are selected by a committee with the purpose of representing the larger US economy and to use it as an indicator of the state of the economy.

Because the S&P 500 has large companies that represent how the economy is doing, investing in an index fund with those same companies will allow you to see a return along side the wider US economy. And over time, the US economy has proven itself to grow and as a safe place to invest money. The index investing strategy in essence throws in your lot with the rest of the economy.

The current list of S&P 500 companies you will recognize because they are influential and integral players in the US economy.

The fact that index funds has proven to be better at giving a return than the majority of mutual funds out there and that it tends to be much cheaper to manage, it's an investing strategy that is prudent and sensible.

When you throw your money into an index strategy with S&P 500 index fund or a Dow Jones Index Fund, you're banking on the assumption that the US economy in general will grow over time. This is certainly not a guarantee that it will happen that way, but it has historically been true.

There are many asset management companies that offer index funds that follow the S&P 500. The Vanguard 500 has been one of the more popular funds by a reputable company. In fact, I remember a business law professor who recommended Vanguard index funds one day during class.

Another popular on is the iShares S&P 500 offered by an asset management fund called BlackRock. BlackRock has a great reputation for fund performance that has far exceeded other funds and has consistently beat the markets they are in. They just acquired Barclays Global Investors and inherited the iShare line of passively managed funds from them.

These are two good companies to start looking for financial products for your index investing strategy. They offer some of the best and highest rated products in the market today.