Index funds now control an estimated twenty to thirty percent of market investments. Index funds may be constituted in the form of Mutual Funds or Exchange Traded Funds. Some people considering investing may consider index funds; while others may already have their retirement invested in an index fund. The question is what do you know about index funds and how they work?
What is an Index:
Index is a standardized method used to track the performance typically of a group of stocks, and, or bonds. An index is a measurement or an indicator of something in the financial world. Indexes are important because they help you establish a benchmark from which you can measure your investment portfolio. You may select an index fund portfolio for your investment, based upon a particular sector or area of interest. For example, you can track the health industry, measuring against the market returns or losses.
Finally on this point, there are an estimated three million indexes existing today, you owe it to yourself to learn about these investments. First, what are the management fees or other costs associated with the fund? Are your Index fund investments automatically guaranteed, or do they shield you from risk ? You can get details about an index from the facts-sheet posted by some index makers. Just to make it clear, you cannot invest in an index but an index fund, which is measured against a particular index.
What are some of the more common or popular indexes against which your funds are measured?
Standard & Poor 500 (S&P500)
The S&P 500 was established in 1957 and tracks about 500 firms in the country. While the stocks or securities on the S&P 500 are public, how the stocks are chosen for the S&P 500, that’s somewhat of a mystery. The stocks are chosen by a secret committee established by the Dow Jones Indices. This committee selects the best U.S. based firms they believe represent the market with an estimated combined $2.2 trillion in assets.
This index measures 407 stocks that rate well on valuing the stocks earnings per share (EPS). In case you don’t know, a company’s EPS indicates or measures its profitability. The higher the EPS, the more profitable the company.
The index will also value or measure the company’s price to earning ratio (P/E). What is that? The price-to-earnings (P/E) ratio relates a company’s share price to its earnings per share. In English, that means it evaluates how much the stock earns, compared to its price.
Other Indexes:
Several other popular indexes used to evaluate your mutual fund or exchange traded funds invest besides the S&P 500 include the Bloomberg U.S. Aggregate Bond ,also known as the “Agg,” This tracks U.S. taxable, investment grade bonds with a BBB rating or higher. To fully understand this you must first know that stocks and bonds have a rating or a grade. In this case, bonds which are rated BBB means that the risk of their default is low. In other words, the likelihood of you not receiving return on your loan or investment is low.
Another index used is the S&P Small Cap 600. This index comprises an estimated 600 small companies which have been profitable over the past year and generally represents all sectors of the economy. According to one report, over the past five years, the S&P 600 annual rate of return on investment was 7.6%.
Lastly, the largest index of them all is the Dow Jones Industrial Average (DJIA). The DJIA was started in 1896 by the Wall Street Journal founder Charles Dow. This index is managed by the S&P Dow Jones Indices. The DJIA is made up of 30 “blue chip” stocks of the largest publicly owned companies in the country. The DJIA is very much tied to daily or current political and social events. That’s why your hear in the news how much the Dow rose or fell at the end of the each day.
An estimated 20 of the 30 companies which constitute the DJIA consist of consumer and industrial manufactured goods companies. The remaining 10 companies which make up the DJIA, represent other industries and sectors such as financial services, entertainment, and others.
If your exchange traded funds are being measured against the DJIA as a benchmark, just know that it is being compared against the 30 largest publicly owned companies in the country, and the political and social climate currently occurring.
WHAT’S UP!
Today’s What’s Up is about the late Tina Turner. Tina Turner died last week at the age of 84. The takeaway here is that in 2021, she began drafting her will and other estate papers to avoid family drama. Unlike Tina, Ike died without a will leaving room open for some of his former wives to challenge his estate. Start working on your estate plan now and avoid confusion. And that’s what’s up!
Ruthven R. Phillip, Esq., is a tax attorney, Stewardship and Philanthropy Ministry Assistant, and CEO of Give2Getrich, LLC. Give2Get Rich, LLC 2023. All Rights Reserved. Any distribution or reproduction of part or all of the contents in any form is prohibited.
