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4 Traits Of A Great Index Fund
The average consumer has likely never heard the name, John Bogle. Bogle, founder of the Vanguard Group and creator of the first index fund, doesnt get as much love as he deserves from the investing world. The company he founded now has $1.7 trillion under management, but he was forced to retire at the mandatory age of 70 and for many industry professionals, the hope was that his retirement would silence a man who was fiercely critical of the world of mutual funds. That didnt happen.
Bogle has long said that the mutual fund world suffers from high fees and lack of accountability to shareholders, as well as too much turnover within the fund, producing extra taxes and commissions.
However, Bogle isnt just hard on the professionals. He and many others believe that trying to be a better stock picker by selecting individual stocks and trying to buy them at just the right time, is a mathematical impossibility. If everybody is trying to beat the market but everybody is the market, theyre almost trying to outsmart themselves.
SEE: Stop Paying High Mutual Fund Fees
Bogle created the index fund as a means of removing the many variables that are nearly impossible to overcome. He said of the index fund, index funds eliminate the risks of individual stocks, market sectors and manager selection. Only stock market risk remains.
However, even index funds have variables and picking the wrong funds can have the same negative effect on your portfolio as other funds. If youre planning to fill your portfolio with index funds, heres what you should look for in a high-quality fund.
1. Low Expenses
Index funds, by their nature, are low-fee instruments, but even Vanguard has funds like the 500 Index Admiral Shares, with an expense ratio of .05%, and the Global ex-U.S. Real Estate Index, which has a 0.50% ratio. Other companies have funds that are even higher.
Picking funds solely based on fees isnt an advisable strategy, but minimizing expenses as much as possible always translates to a higher portfolio balance .
2. Correlation to the Underlying Index
What good is an index fund if it isnt correlated to the market? If the S
