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Cumulative figure for all share classes from the 2013 calendar year through the 2019 calendar year for Vanguard's U.S.-domiciled index mutual funds and ETFs. Estimated savings is the difference between prior and current expense ratios multiplied by average assets under management (AUM). Average AUM is based on month-end assets, which are then averaged over the 12 months of the calendar year. Ending assets are as of December 31, 2019.
Each index fund contains a preselected collection of hundreds or thousands of stocks, bonds, or sometimes both. If a single stock or bond in the collection is performing poorly, there's a good chance that another is performing well, which helps minimize your losses.
Index funds don't change their stock or bond holdings as often as actively managed funds. This often results in fewer taxable capital gains distributions from the fund, which could reduce your tax bill.
2 Vanguard average expense ratio: 0.06%. Industry average expense ratio: 0.20%. All averages are for index mutual funds and ETFs and are asset-weighted. Industry average excludes Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2021.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after its target date.
Because they aim to duplicate the makeup of a market index, there are lower costs to own an index fund. While many other types of mutual funds pursue an active investing strategy, with fund managers picking winning investments, index funds are considered to be a form of passive investing.
Fund managers maintain the asset allocation by tracking an index. Index funds typically have low minimum investment requirements, and investors get access to excellent liquidity as fund will always redeem their shares at short notice.
Like index funds, ETFs pool money from many investors and put the money into a diversified portfolio of stocks, bonds or other assets. When investors buy shares, they receive an interest in that investment pool.
These fund managers then mimic the index, creating a fund that looks as much as possible like the index, without actively managing the fund. Over time the index changes, as companies are added and removed, and the fund manager mechanically replicates those changes in the fund.
Some of the most watched indexes fill up the financial news every night and are often used as shorthand for the performance of the market, with investors tracking them to get a read on how stocks as a whole are faring.
While some funds such as S&P 500 or Nasdaq-100 index funds allow you to own companies across industries, other funds own only a specific industry, country or even investing style (say, dividend stocks).
The list below includes index funds from a variety of companies tracking a broadly diversified index, and it includes some of the lowest-cost funds you can buy and sell on the public markets. When it comes to index funds like these, one of the most important factors in your total return is cost. Included are three mutual funds and seven ETFs:
The Nasdaq-100 Index is another stock market index, but is not as diversified as the S&P 500 because of its large weighting in technology shares. These two funds track the largest non-financial companies in the index.
While the S&P 500 and Nasdaq are two of the most popular stock market indexes, there are many others that track different parts of the investment universe. These three index funds are also worth considering for your portfolio.
Your first step is finding what you want to invest in. While an S&P 500 index fund is the most popular index fund, they also exist for different industries, countries and even investment styles. So you need to consider what exactly you want to invest in and why it might hold opportunity:
ETFs have become more popular recently because they help investors avoid some of the higher fees associated with mutual funds. ETFs are also becoming popular because they offer other key advantages over mutual funds.
Index funds tend to be much cheaper than average funds. Compare the numbers above with the average stock mutual fund (on an asset-weighted basis), which charged 0.47 percent, or the average stock ETF, which charged 0.16 percent. While the ETF expense ratio is the same in each case, the cost for mutual funds generally is higher. Many mutual funds are not index funds, and they charge higher fees to pay the higher expenses of their investment management teams.
An index fund is typically created around a specific theme. For example, there are indexes for companies based on their geographic location (such as the U.S.), their size (large companies, as in the S&P 500), their sector (such as semiconductors or healthcare), or whether they pay dividends. An index might also consist of only bonds, or only bonds of a certain quality and duration.
In contrast, the Dow Jones Industrials contains just 30 companies, while the Nasdaq 100 contains about 100 companies. While the holdings of these indexes do overlap, the S&P 500 contains the widest variety of companies across industries and is the most broadly diversified of those three indexes.
Index investing, sometimes referred to as passive investing, is typically done by investing in a mutual fund or exchange-traded fund (ETF) that aims to track a particular index. This type of investing strategy can be appealing if you don't have the time or experience to research which specific stocks, bonds, or other investments you may want to include in your portfolio.
And while you can't invest directly in an index, many mutual funds and exchange traded funds, or ETFs, track these indexes, often simply holding the same stocks in the same proportions as are in the index.
Index funds are typically low cost compared to either buying stocks individually, where you pay a commission for each purchase or sale, or investing in actively managed funds that choose stocks and make trades.
Sometimes a simple, straightforward approach is best. Index funds provide the benefit of diversification, and they tend to be cost effective and tax efficient. Investing in index mutual funds and index ETFs allows you to own multiple companies without regularly choosing which ones to buy or sell, and offers the following benefits.
Expenses erode returns over time. There are fees associated with any investment. But over time, the fees you pay can really add up, which is why low-cost index investing can leave more of your money invested for growth.
By definition, index funds aim simply to track their benchmark indexes before fees and expenses. Actively managed funds may fall short of market indexes over time. Over the 5- and 10-year periods ending June 30, 2022, the average active equity fund manager lagged the broader market, as represented by the Schwab 1000 Index.
Source: Charles Schwab Investment Advisory (CSIA) with data from Morningstar, Inc. Fund return is the weighted average time-weighted return of all active funds in the following Morningstar categories: US Fund Large Blend. Each fund is represented by its oldest share class. US market index returns are represented by the Schwab 1000 Index. Index returns assume reinvestment of dividends and interest. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Past performance is no indication of future results.
Over time, returns lost to taxes add up. In this hypothetical example, $100,000 invested in an active equity fund would have lost over $6,700 more to taxes over 10 years compared to an index equity fund.
Source: Charles Schwab Investment Advisory, Inc. (CSIA) gathered data on all of the unique equity mutual funds with at least 10 years of performance in the Morningstar Direct database as of 6/30/2022 (2,282 funds). The average 10-year tax cost ratio was calculated for the index funds and the non-index funds in that group. Tax cost ratio is a Morningstar measure of how much an investor in the highest bracket would have lost each year to federal income taxes due to fund distributions. The tax cost ratio for each fund type (index and non-index) was subtracted from the S&P 500's average return over that time period (12.96% per year), and that net-of-tax-loss return was used to calculate how much $100,000 would have grown over the 10-year period.
This table compares Schwab market cap index mutual funds to the average operating expense ratio (OER) within each mutual fund's respective Morningstar Institutional Category as determined by Morningstar. The industry average OER is a straight average of all index mutual funds assigned to the Morningstar Institutional Category. Information shown above as of September 2022. 041b061a72