What is an index fund?

An index fund is a mutual fund or ETF that mimics the movements of a specific market. Think for instance of the well-known S&P500. This is an index of the 500 largest companies in America. An index fund that follows the S&P500 tries to simulate the movements of this market as accurately as possible.

An index fund is a popular form of investment for many first-time investors because you do not have to trade individual shares yourself. Legendary investor Warren Buffett once said that index funds are the best way to invest for later. Time to explore this beautiful financial instrument!

Benefits of index funds

Investing in an index fund brings a number of advantages:  

• Index funds tend to have a lower risk as the investments are spread out
• An index fund does not require active trading and therefore takes little time.
• Some index funds bring tax benefits

6 key factors of an index fund

Worldwide, there are about 126,000 index funds, so the range is huge. There are several index funds for almost every market. To determine which index fund to go for, there are a number of important factors to take into account if you want to make the right choice.  

Factor 1: Quality of the index fund

It is important to choose an index fund managed by a fund manager with a good reputation. You can judge a fund manager on how long they have existed and what results they have achieved, but also on business factors such as staff turnover. In addition, you can look at the certification, such as the ISAE 3402.

Factor 2: Assets under Management

Assets under Management (AuM) is how much assets an index fund manages. Often, a higher AuM means that the index fund is easier to trade. Also, a fund with more AuM often has lower costs than a fund with less AuM. How much AuM an index fund must have depends on the market it follows.

Factor 3: ESG score

ESG stands for Environment, Social and Governance. If sustainability is important to you, this is an indicator you should look at. The higher an index fund scores on, for example, the MSCI ESG rating, the more this fund takes people, the environment and society into account with its investments.

Factor 4: Use of derivatives

To follow the price of the index as closely as possible or to make extra profits, some index funds use derivatives. These are financial instruments with which you do not fully own the traded instrument. It is important to know that the use of derivatives involves an extra layer of risk. This is because derivatives are leveraged products. A small price fluctuation can cause a large change in value and therefore a loss.

Factor 5: Tracking

Tracking is to what extent the index fund tracks the actual price of the market. In other words, how closely the index fund follows the benchmark. If you want to follow a specific market, you obviously want an index fund that is as accurate as possible.

Factor 6: Currency

The currency of the index fund or its investments may affect performance. Does the fund trade in dollars? Then you are dependent on the euro-dollar ratio if you want to sell some of your investments. This can work to your advantage or disadvantage, depending on how the market changes.

Choose index funds that suit you

Do you want your money to work smartly, without having to buy and sell index funds yourself? Then let Vive invest your money. We put your money to work by:

• Tailoring an investment strategy
• Implementing this investment strategy professionally for you
• Keep track of all your investments 24/7

Do you want to experience how simple investing can be?

Please note that asset management is not without risk .