Index funds are low cost mutual funds that track indices such as the S&P 500 or the TSX Composite. The money inside the funds are allocated among stocks/bonds in the same way the indices are allocated. For example, if TD was 5% of the TSX 60, 5% of the TSX 60 index fund would be invested in TD. Because index funds follow a prescribed way of allocating funds, they don’t have managers.
A company called Vanguard created the first index fund, because it believed that index funds would outperform most mutual funds. It believed this because academic research revealed that most fund managers couldn’t outperform the market over the long run, even before fees. Vanguard believed that by eliminating the fees, its index funds would outperform most other mutual funds in the long run.
They were right, and their investors rewarded them by giving them more money to manage. As a result, Vanguard’s funds are among the biggest in the world.
Read the full article on www.moneygeek.ca