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Mutual Funds
Index Funds
What are Index Funds?
We lead extremely busy lives. Some of us simply don't have the time to play an active role in our investments. If you're looking for a passive investment strategy with low fees, index funds can be a good option. They're designed to track and perform like market indices. Index funds purchase securities that make up a market index. These funds attempt to match the market instead of trying to beat it.
What are market indices?
A market index uses standardized metrics and methodologies to measure the performance of a basket of individual securities. They’re often used as a benchmark for assessing the performance of a given investment. Some of the best-known indexes include the Dow Jones Industrial Average and the S&P 500. Comparing the performance of a given investment to a market index can help you understand how well your investments held within your portfolio are performing and whether changes to your portfolio may be required to earn higher returns.
Key Highlights
Index Funds vs Actively Managed Funds vs ETF
Explore the differences between fund types.
|
Index Fund (Passively Managed) |
Actively Managed Fund |
Actively Managed Exchange Traded Fund (ETF) |
|
|---|---|---|---|
|
Overview |
Track the performance of market indices to yield market-average returns. Prices are set daily at market close. |
A pool of pre-selected securities that seek to outperform the market. Prices are set daily at market close. |
A collection of securities that trade on a stock exchange. Prices fluctuate throughout the day as trades are made on the open market. Prices fluctuate throughout the day as trades are made on the open market. |
|
MER |
Lower expense ratio |
Higher expense ratio |
Lower expense ratio |
|
Management |
Requires a fund manager |
Requires a fund manager |
Requires a fund manager |
|
Fees |
They may have management fees |
They have both transaction and management fees |
They have both transaction and management fees |
Index Fund FAQs
You can buy and sell index funds by opening an investment account. If you open an investment account with a bank, credit union or another financial institution, they can help you select an index fund that’s right for you. Alternatively, you can select index funds yourself by opening a self-directed investment account through an online brokerage firm like TD Direct Investing that gives you access to a wide variety of investment asset classes including index funds, mutual funds, ETFs, stocks and more. Commissions and fees apply depending on what you trade and your minimum account balance1.
It all depends upon your investing strategy. For some investors, index funds may be a low-cost way to spread their investment dollars across many different investments and build a diversified portfolio. They have a lower MER compared to non-index ETFs and mutual funds. Investing in index funds lets you invest in a diversified range of investments at lower costs.
The stock market can be volatile and unpredictable at times. However, most market indices tend to rise in value over time. As index funds mirror the performance of market indices, while not guaranteed, they may be considered by some to be stable investments over the long-term and can be helpful in building a diversified portfolio.
Index ETFs have no minimum, and you can buy as little as one share. Make sure to consider your capacity for risk and investment objectives before investing.
The S&P 500 is an index that tracks the value of stocks offered by the 500 companies in the U.S. with the largest market capitalization. You can’t invest directly in the S&P 500, but you can invest in individual stocks tracked by the S&P 500, or mutual funds and exchange traded funds that track the S&P 500. To try and match the performance of the S&P 500, mutual funds that track the S&P 500 usually include stocks from most, if not all, of the companies listed within the S&P 500.
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