What is an index fund?

An index fund is an investment fund or ETF that mimics the movements of a specific market. Consider, for example, the well-known S&P500. This is an index of the 500 largest companies in America. An index fund that tracks the S&P500 attempts to simulate the movements of this market as accurately as possible.

An index fund is a popular form of investment for many beginner investors, as you do not have to trade individual shares yourself. Legendary investor Warren Buffett once said that index funds are the best means for investing for the future. Time to investigate this fine financial instrument!

‍Advantages of Index Funds

‍Investing in an index fund brings a number of advantages:  

• Index funds generally have a lower risk because the investments are diversified
• An index fund does not require active trading and therefore costs little time
• Some index funds come with tax advantages

6 important factors of an index fund

‍There are approximately 126,000 index funds worldwide, so the supply is enormous. Multiple index funds can be found for virtually every market. To determine which index fund you should choose, there are a number of important factors you should take into account if you want to make the right choice.  

‍Factor 1: Quality of the Index Fund

‍It is important to choose an index fund that is managed by a fund manager with a good reputation. You can assess a fund manager based on how long they have existed and what results they have achieved, but also on company factors such as staff turnover. In addition, you can look at the certification, such as the ISAE 3402.

‍Factor 2: Assets under Management

‍Assets under Management (AuM) is the amount of assets an index fund manages. A higher AuM often means that the index fund is easier to trade. Also, a fund with more AuM often charges lower costs than a fund with less AuM. The required AuM for an index fund depends on the market it tracks.

‍Factor 3: ESG Score

‍ESG stands for Environment, Social, and Governance. If sustainability is important to you, this is a benchmark you should look at. The higher an index fund scores on, for example, the MSCI ESG rating, the more this fund considers people, planet, and society with its investments.

‍Factor 4: Use of Derivatives

‍To follow the index price as accurately as possible or to achieve extra profit, some index funds use derivatives. These are financial instruments where you do not fully own the instrument being traded. It is important to know that the use of derivatives brings an extra layer of risk. This is because derivatives are leveraged products. A small price fluctuation can cause a large change in value and thus a loss.

‍Factor 5: Tracking

‍Tracking is the extent to which the index fund keeps up with the actual price of the market. In other words, how accurately the index fund follows the benchmark. If you want to follow a specific market, you naturally want an index fund that is as accurate as possible.

‍Factor 6: Currency

‍The currency of the index fund or its investments can influence performance. Does the fund trade in dollars? Then you are dependent on the Euro-Dollar exchange rate if you want to sell a portion of your investments. This can work in your favour or against you, depending on how the market changes.

Choose Index Funds that Suit You

‍Do you want your money to work smartly, without having to buy and sell index funds yourself? Then let Vive invest your money. We put your money to work by:

• Creating a tailor-made investment strategy
• Professionally executing this investment strategy for you
• Monitoring all your investments 24/7

Do you want to experience for yourself how simple investing can be?

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‍‍Note: wealth management is not without risk.