{"id":27896,"date":"2012-03-02T10:39:30","date_gmt":"2012-03-02T15:39:30","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2012\/03\/02\/investing-in-index-funds\/"},"modified":"2012-03-02T10:39:30","modified_gmt":"2012-03-02T15:39:30","slug":"investing-in-index-funds","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2012\/03\/02\/investing-in-index-funds\/","title":{"rendered":"Investing in Index Funds"},"content":{"rendered":"<div align=\"left\"><script type=\"text\/javascript\">\ntweetmeme_style = 'compact';\n<\/script><br \/>\n<script type=\"text\/javascript\" src=\"http:\/\/tweetmeme.com\/i\/scripts\/button.js\"><\/script>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-27832\" title=\"More and more investors are switching from actively managed mutual funds to passively managed index funds in the hopes of better returns...\" src=\"http:\/\/www.investmentu.com\/wp-content\/uploads\/2012\/03\/index-funds.jpg\" alt=\"Investing in Index Funds\" width=\"600\" height=\"194\" \/><\/p>\n<p>I guess not much has changed in the land of actively managed funds over the last several years.<\/p>\n<p>In 2006, former <em>Investment U<\/em> Chairman, Mark Skousen wrote, \u201c80% of actively managed funds fail to beat the market.\u201d<\/p>\n<p>Fast-forward to last year, and <em>TIME <\/em>Magazine reports, \u201cAmong large-cap fund managers, 79% trailed the return of the S&amp;P 500.\u201d<\/p>\n<p>Yet this is only the beginning&#8230; In 2011, <em>TIME<\/em> adds, \u201c57% of global funds, 65% of international funds, and 81% of emerging market funds trailed their benchmarks.\u201d<\/p>\n<p>You\u2019d think investors would get tired of paying excessive fees for funds managed by experts who, more than half the time, don\u2019t even beat the market they\u2019re looking to in any given year.<\/p>\n<p>Well, although the majority of investors still invest in actively managed funds today, it appears more and more are switching to passively managed index funds in the hopes of better returns.<\/p>\n<h2><strong>Index Funds At a Glance<\/strong><\/h2>\n<p>Index funds are simply investments that try to replicate the index of a specific market.<\/p>\n<p>Unlike actively managed funds, index funds are passively managed. That means instead of having a fund manager choose which stocks are likely to head higher in any given index, an index fund would simply own all of the stocks in the index.<\/p>\n<p>At the end of the year, this allows index funds to charge less in fees as opposed to actively managed funds. And it minimizes the taxes investors would incur had they gone with an actively managed fund.<\/p>\n<p>There are two ways to invest in index funds, through a mutual fund or an ETF.<\/p>\n<p>The <strong>Vanguard 500 Index Fund<\/strong> (Nasdaq: <a href=\"http:\/\/www.google.com\/finance?q=VFINX\" target=\"_blank\">VFINX<\/a>) is an example of an index mutual fund that seeks to track the performance of the S&amp;P 500.<\/p>\n<p><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-27812\" title=\"The Vanguard 500 Index Fund (Nasdaq: VFINX) is a mutual fund designed to track the performance of the S&amp;P 500.\" src=\"http:\/\/www.investmentu.com\/wp-content\/uploads\/2012\/03\/vanguard-500-index-vs-sp-500.jpg\" alt=\"Vanguard 500 Index vs. S&amp;P 500\" width=\"543\" height=\"336\" \/><\/p>\n<p>Over the past five years, and as you\u2019d hope, this fund\u2019s chart looks strikingly similar to the S&amp;P 500.<\/p>\n<p>Yet, digging even deeper, traditional index funds like the Vanguard 500 Index may also have a major flaw&#8230;<\/p>\n<p>They are cap weighted.<\/p>\n<p>This means the companies with the biggest market caps in the indices they track make up the majority of the fund. Put simply, these funds invest in companies based on Wall Street \u201cpopularity,\u201d not necessarily based on their <a title=\"Investment U\u2019s Fundamental Principles of Investing\" href=\"http:\/\/www.investmentu.com\/investment-u-fundamental-principles-of-investing.html\">fundamentals<\/a>.<\/p>\n<p>As <em>Reuters<\/em> recently reported, \u201cCap weighting tends to load up on the most expensive companies and shuns the big companies trading at deep discounts.\u201d<\/p>\n<p>So, what can you do?<\/p>\n<p>The answer may lie in alternative index funds.<\/p>\n<h2><strong>Alternative Index Funds<\/strong><\/h2>\n<p>There are two alternative index funds to consider that can increase return with <a title=\"Does Low Volatility Put Your Portfolio At Risk?\" href=\"http:\/\/www.investmentu.com\/2012\/January\/low-volatility-portfolio.html\">less volatility<\/a> than their traditional cousin&#8230;<\/p>\n<ul>\n<li>Equal-weighted index fund<\/li>\n<li>Fundamental index fund<\/li>\n<\/ul>\n<p>Equal-weighted index funds simply invest the same percentage into each of the stocks in it the index it\u2019s tracking. An example of this is the <strong>Rydex S&amp;P Equal Weight<\/strong> (NYSE: <a href=\"http:\/\/www.google.com\/finance?q=RSP\" target=\"_blank\">RSP<\/a>), which was the first ETF to use equal weighting.<\/p>\n<p>This index fund holds all the stocks that you\u2019d see in a traditional S&amp;P 500 index fund. But instead of making the S&amp;P a \u201cpopularity contest,\u201d it simply <a title=\"Asset Allocation Model for Maximum Gains\" href=\"http:\/\/www.investmentu.com\/asset-allocation-model.html\">allocates<\/a> 0.2% of the portfolio to each company in the S&amp;P 500.<\/p>\n<p>On the other hand, index funds weighted by their fundamentals, like the <strong>Powershares FTSE RAFI US 100<\/strong> (NYSE: <a href=\"http:\/\/www.google.com\/finance?q=PRF\" target=\"_blank\">PRF<\/a>), weights its index based on a company\u2019s book value, free cash flow, revenue and dividends.<\/p>\n<p>Both of these alternatives funds are technically passively managed, so they won\u2019t cost as much as an actively managed ETF or <a title=\"Mutual Fund Investment Strategy: If You Can\u2019t Beat Them, Join Them\" href=\"http:\/\/www.investmentu.com\/2006\/November\/20060922.html\">mutual fund<\/a>. But you\u2019ll probably pay higher annual fees than simply investing in a traditional index fund. This is simply because fundamental and equal weight index funds require more maintenance throughout the year to maintain.<\/p>\n<p>But at the end of the day, these alternative index funds also give you the opportunity to increase your returns with less volatility than a traditional index fund.<\/p>\n<p>Good Investing,<\/p>\n<p>Mike Kapsch<\/p>\n<div>\n<a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FtfoDSFORpg:zHVkFn2Lc-8:yIl2AUoC8zA\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=yIl2AUoC8zA\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FtfoDSFORpg:zHVkFn2Lc-8:V_sGLiPBpWU\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FtfoDSFORpg:zHVkFn2Lc-8:V_sGLiPBpWU\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FtfoDSFORpg:zHVkFn2Lc-8:qj6IDK7rITs\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?d=qj6IDK7rITs\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FtfoDSFORpg:zHVkFn2Lc-8:gIN9vFwOqvQ\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FtfoDSFORpg:zHVkFn2Lc-8:gIN9vFwOqvQ\" border=\"0\"><\/img><\/a> <a href=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?a=FtfoDSFORpg:zHVkFn2Lc-8:F7zBnMyn0Lo\"><img decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~ff\/InvestmentU?i=FtfoDSFORpg:zHVkFn2Lc-8:F7zBnMyn0Lo\" border=\"0\"><\/img><\/a>\n<\/div>\n<p><img loading=\"lazy\" decoding=\"async\" src=\"http:\/\/feeds.feedburner.com\/~r\/InvestmentU\/~4\/FtfoDSFORpg\" height=\"1\" width=\"1\" \/><\/p>\n<p>Article by <a href=\"http:\/\/www.investmentu.com\/\" target=\"_blank\">Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"<p>I guess not much has changed in the land of actively managed funds over the last several years. In 2006, former Investment U Chairman, Mark Skousen wrote, \u201c80% of actively managed funds fail to beat the market.\u201d Fast-forward to last year, and TIME Magazine reports, \u201cAmong large-cap fund managers, 79% trailed the return of the &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/www.investmacro.com\/fx\/2012\/03\/02\/investing-in-index-funds\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Investing in Index Funds&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-27896","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/27896","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=27896"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/27896\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=27896"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=27896"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=27896"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}