Global InformationIndex fund information
An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that it can replicate the performance ("track") of a specified basket of underlying investments.[1] While index providers often emphasize that they are for-profit organizations, index providers have the ability to act as "reluctant regulators" when determining which companies are suitable for an index.[2]: 1244–45 Those rules may include tracking prominent indices like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allow for greater tracking error but lower market impact costs. Index funds may also have rules that screen for social and sustainable criteria.
An index fund's rules of construction clearly identify the type of companies suitable for the fund. The most commonly known index fund in the United States, the S&P 500 Index Fund, is based on the rules established by S&P Dow Jones Indices for their S&P 500 Index. Equity index funds would include groups of stocks with similar characteristics such as the size, value, profitability and/or geographic location of the companies. A group of stocks may include companies from the United States, Non-US Developed, emerging markets or frontier market countries. Additional index funds within these geographic markets may include indexes of companies that include rules based on company characteristics or factors, such as companies that are small, mid-sized, large, small value, large value, small growth, large growth, the level of gross profitability or investment capital, real estate, or indexes based on commodities and fixed-income. Companies are purchased and held within the index fund when they meet the specific index rules or parameters and are sold when they move outside of those rules or parameters. Think of an index fund as an investment utilizing rules-based investing. Some index providers announce changes of the companies in their index before the change date whilst other index providers do not make such announcements.
The main advantage of index funds for investors is they don't require much time to manage as the investors don't have to spend time analyzing various stocks or stock portfolios. Most investors also find it difficult to beat the performance of the S&P 500 Index.[3] Some legal scholars have previously suggested a value maximization and agency-costs theory for understanding index funds stewardship.[4]: 4
As of 2014[update], index funds made up 20.2% of equity mutual fund assets in the US. Index domestic equity mutual funds and index-based exchange-traded funds (ETFs), have benefited from a trend towards more index-oriented investment products. From 2007 through 2014, index domestic equity mutual funds and ETFs received $1 trillion in new net cash, including reinvested dividends. Index-based domestic equity ETFs have grown particularly quickly, attracting almost twice the flows of index domestic equity mutual funds since 2007. In contrast, actively managed domestic equity mutual funds experienced a net outflow of $659 billion, including reinvested dividends, from 2007 to 2014.[5] Passively managed funds, such as index funds, consistently overperform actively managed funds.[6][7][8] Investors Warren Buffett and John C. Bogle have long been a strong proponent of Index funds.[9][10][11][12][13][14]
- ^ "Reasonable Investor(s)". Retrieved 2024-02-08.
- ^ Hirst, Scott; Kastiel, Kobi (2019-05-01). "Corporate Governance by Index Exclusion". Boston University Law Review. 99 (3): 1229.
- ^ "Can Anybody Beat the Market?". Investopedia. Retrieved 2022-01-03.
- ^ Hirst, Scott (2019-09-01). "Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy". ECGI - Law Working Paper. 433/2018.
- ^ "2014 Investment Company Fact Book". Archived from the original on 2016-06-20. Retrieved 2014-11-05.
- ^ "Mutual Funds That Consistently Beat the Market? Not One of 2,132". New York Times. 2022-12-02. Retrieved 2023-08-21.
- ^ Choi, James J. (2022). "Popular Personal Financial Advice versus the Professors". Journal of Economic Perspectives. 36 (4): 167–192. doi:10.1257/jep.36.4.167. ISSN 0895-3309.
- ^ Malkiel, Burton G. (2013). "Asset Management Fees and the Growth of Finance". Journal of Economic Perspectives. 27 (2): 97–108. doi:10.1257/jep.27.2.97. ISSN 0895-3309.
- ^ Pisani, Bob (2022-10-03). "Billionaire Warren Buffett swears by this inexpensive investing strategy that anyone can try". CNBC. Retrieved 2024-02-08.
- ^ Krishnan, Aarati (2022-08-07). "Why Buffett bats for index funds". The Hindu. ISSN 0971-751X. Retrieved 2024-02-08.
- ^ CFP®, Emmie Martin (2018-01-03). "Warren Buffett just won a $1 million bet—and highlighted one of the best ways to grow wealth". CNBC. Retrieved 2024-02-08.
- ^ "Warren Buffett on Index Funds". Retrieved 2024-02-08.
- ^ "40 years after his "folly," Bogle's index funds reign". AP News. 2019-01-23. Retrieved 2024-02-08.
- ^ "John Bogle's Advice: Live Long and Prosper, on Index Funds". Knowledge at Wharton. Retrieved 2024-02-08.