To explain how it is possible to lose money in an index fund, we first need to define what this investment is. You might also see an index fund referred to as a mutual fund. This is because an index fund is actually a type of mutual fund or exchange-traded fund (ETF). The only difference? What makes up this fund. In general, an index fund is a diversified group of publicly traded securities. When combined, this group of assets should mirror the performance of a market index or at least a segment of it. This index is a hypothetical portfolio of investment holdings that are believed to be representative of a segment of the financial market. This fund is managed and balanced by a firm.
For investors, this is great news! This means you can theoretically dip your toes into all of these different industries without doing your due diligence and researching any of the individual stocks. This sounds pretty good to us. After all, this sounds like an easy investment choice. But most of us know the easiest choice isn’t always the right choice when it comes to investing.
Should You Invest In Index Funds?
While we continue to believe that a well-diversified representation of the market should be safe. However, consider this. An index fund will only ever be as stable as it’s underlying index. Index funds are great since they expose your portfolio to broader market exposure. This results in lower operating expenses and lower portfolio turnover. However, just because it tracks an index doesn’t mean it is a well known one. Therefore, doing some research about the index ahead of time is necessary.
Since index funds are so diversified, it is highly unlikely that they will lose all their value. Consider that to lose EVERYTHING every stock that makes up the index would also have to go to zero. While this is unlikely if every stock were to go bankrupt simultaneously. Even if this were to happen, you would likely get some of the money you invested in back when the firm sells off its assets. So in short, we would say for a lower risk investment index funds are the way to go. It makes it more difficult to lose all your money. However, this doesn’t mean that they can’t lose any money. Index funds are best used in a long-term strategy since the portfolio typically can’t protect you against any short term market downturns.
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Best Index Funds
Okay, we might’ve won you over on the concept of index funds but here is where it gets tricky. Consider that there isn’t just one index fund. There are many indexes and many funds that represent each of them. So where do you begin? We put together a list of some of the best index funds and crypto index funds.
Like all of our other articles on trading, please be advised that we are not financial experts. These articles are merely a place to start your research.
S&P 500 Index Fund
As of May 2020, the S & P 500 index fund has continued to outperform the majority of other index funds. In general terms, this fund is an investment vehicle that invests in the 500 stocks that encompass the S & P 500 index in proportions that are market cap-weighted. Over time, they have continued to prove their low-risk high reward with an approximate 10% annual growth rate.
Among the most popular S&P 500 Index funds you should consider are the:
- Vanguard 500 Index Fund
- Schwab S & P 500 Index Fund
- Fidelity 500 Index Fund
- T.Rowe Price Equity Index 500 Fund
- iShares Core S & P 500 Fund
Although slightly different, these funds are known for being among the most accurate representations of the US stock market.
Bitwise 10 Crypto Index Fund
For those crypto lovers looking for a safer way to invest in crypto, we might just have the crypto index fund for you. The Bitwise Index Fund tracks the cryptocurrencies in the Bitwise 10 Large Cap Crypto Index. This is a basket of the largest coins and includes exposure to approximately 80% of the crypto markets. These coins are then weighted by a 5-year diluted market diluted capitalization and rebalanced monthly. All assets are backed by 100% cold storage with multi-signature configuration to ensure the security of the fund.
iShares Edge MSCI Min Vol EAFE ETF
If neither of these funds seemed like a good fit, this one might take a different approach. The EFAV fund opens your portfolio to international securities. The securities are chosen from well-established companies in developed markets from Europe, Australia, Asia, and the Far East. This gives your portfolio even greater diversity with security in knowing that it typically has declined less than other portfolios during downturns.
Fidelity ZERO Large Cap Index
Next on the list is the Fidelity ZERO Large Cap Index. This index fund has a zero expense ratio. Rather than following the S & P 500 it follows the Fidelity U.S. Large Cap Index. While this isn’t the same as the S & P it is remarkably close. The only difference? The savings from not paying the S & P name fee keeps the cost of investing 0. The year to date return is currently 8.23% which can be attributed to the fund investing at least 80% of assets into common stocks. These stocks are considered large-capitalization stocks. This means stocks that are of the largest U.S. companies based on market capitalization. To most, this would suggest greater stability.