Q: I often read about the S&P 500 Index Fund. What are some of the other index funds available that have a reliable history of performance? What is the most efficient way to invest in index funds?
A: The market has been on a nerve-racking trip lower. This year’s optimistic outlook has vaporized.
“Everyone seems to agree that the overseas economic outlook has deteriorated badly,” writes Ed Yardeni, head of his own firm, Yardeni Research Inc. “The question is whether the U.S. economy can weather a global downturn and provide enough growth to moderate it.”
I don’t think the economy is headed into recession. That said, I’m glad to take your question about investing with index funds when the market is performing so poorly. An investment in an index fund will do as poorly — or as well — as the underlying index minus fees. The most famous equity index is the Standard & Poor’s 500 equity index, comprised of the 500 largest publicly traded U.S. companies. Other good broad-based indexes include the Russell 3000 and the Wilshire 5000 Total Market Index. The Russell 2000 is a broad-based index designed to reflect smaller-and medium-sized companies. The Europe Asia Far East index (EAFE) is a well-known international equity index.
Indexing is often called “passive” investing. There‘s no professional money manager trying to beat the market. Yet the broad-based, low-cost index funds routinely outperform most actively managed funds over time largely thanks to their extremely low fees. You can invest in a low-fee equity index either through a mutual fund or through an exchange traded fund.
A note of caution: Many index mutual funds and ETFs slice and dice the market into smaller and smaller pieces. ETFs in particular are increasingly designed for quick speculations rather than long-term investing. If you want to invest money all at once, an ETF based on the S&P 500, the Wilshire 5000 and similar broad-based indexes works well. For investments that you’re adding to over time, I prefer equity index mutual funds.
Morningstar offers good information on index funds. You could also read “The Random Walk Guide To Investing,” by Burton Malkiel or “The Elements of Investing,” by Malkiel and Charles Ellis. Both books will hold you in good stead for long-term investing.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.