Different index funds are weighted in a different way. Whatever type of index fund or funds you choose, make sure you understand the methodology, so you can stay away from an investment that doesn't behave the way you expected.
Representing nearly 15% of all mutual fund assets today, index funds have become an increasingly popular choice for investors. The first index fund, introduced by Vanguard in 1976, tracks the S&P 500, and today that index is by far the most popular one used, accounting for about 37% of all index fund assets.
The core premise behind index investing is that beating the market consistently over the long term through actively picking stocks that will outperform is extremely difficult. Instead, the most basic index funds seek to capture the market's performance itself in the belief that the investors who participate in it are fundamentally rational and also value stocks at or near their fair values.
In some cases, if an index is too broad or securities in it too illiquid for a fund to adequately track, the fund's manager might try to mimic the index's performance through a technique called representative sampling.
Although index funds seem to track anything and everything, there are a few primary ways of constructing them, from conventional market-cap weighting to alternative methods such as equal, fundamental, or price weighting. Read more "How Index Funds Are Weighted"
Investors kept pumping more money into U.S. mutual funds and exchange-traded funds (ETFs) in December 2008, finishing the year with a flourish. Behind the industry expansion, stock mutual funds suffered record net outflows.
Exchange-traded funds attracted nearly $178.4 billion in net inflows for the year. That was a record, some 20% more than the previous high, which was set in 2007. The latest National Stock Exchange data estimated that in last year's final month, ETFs had a record $42.8 billion net inflow.
U.S. mutual funds saw net inflows of $503.2 billion in 2008, the research firm Lipper Inc said. But stock funds saw net outflows of $176.7 billion for the whole of 2008, it said. The net inflow to U.S. mutual funds was chiefly contributed by net $658.2 billion money-market funds as investors took shelter in the relatively safe instruments on concerns about volatile stock and bond markets. Read more "ETF Gains Favor Over Mutual Fund"
Mutual funds allow a group of investors to combine their cash and invest it. By pooling their money together, mutual fund investors can sample a broader range of stocks or bonds than they could if they were trying to buy the stocks and bonds on their own. When you buy a mutual fund, you're actually buying an ownership stake in a corporation that in turn hires a fund manager to invest its money. The price of a single ownership stake in a fund is called its net asset value, or NAV.
The fund manager combines your money with that of other investors. Taken altogether, those investments are called the fund's assets. The fund manager invests the fund's assets, typically by buying stocks, bonds, or a combination of the two. Some funds buy more complicated security types. These stocks or bonds are often referred to as a fund's "holdings," and all of a fund's holdings together are its "portfolio."
A fund's type depends on the kinds of securities it holds. For example, a stock fund invests in stocks, while a small-company stock fund focuses on the stocks of small companies. What you get as an investor or shareholder is a portion of that portfolio. Regardless of how much or how little you invest, your shares are the portfolio in miniature. Read more "What is Mutual Fund?"