What is an index fund?

An index fund is an investment fund or ETF that mimics the movements of a specific market. Think, for example, of the well-known S&P500. That 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 starting investors, because you don't have to trade individual shares yourself. The legendary investor Warren Buffett once said that index funds are the best tool for investing for the future. Time to investigate this beautiful financial instrument!

‍Advantages of index funds

‍Investing in an index fund has several advantages:  

• Index funds generally have a lower risk because the investments are diversified
• You don't have to actively trade an index fund and therefore it takes little time
• Some index funds offer tax benefits

6 important factors of an index fund

‍There are approximately 126,000 index funds worldwide, so the supply is gigantic. There are multiple index funds for almost every market. To determine which index fund you should go for, there are a number of important factors that you should 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 that is managed by a fund manager with a good reputation. You can assess a fund manager based on how long they have been in business and what results they have achieved, but also on company factors such as employee turnover. You can also look at the certification, such as the ISAE 3402.

‍Factor 2: Assets under Management

‍Assets under Management (AuM) refers to the total value of assets managed by an index fund. A higher AuM often indicates that the index fund is easier to trade. Additionally, a fund with a higher AuM often has lower costs than a fund with a lower AuM. The required AuM for an index fund depends on the market it tracks.

‍Factor 3: ESG score

‍ESG stands for Environment, Social and Governance. If sustainability is important to you, this is a metric to consider. 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 track the index price as accurately as possible or to achieve extra profit, 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 loss.

‍Factor 5: Tracking

‍Tracking is the extent to which the index fund keeps track of the actual price of the market. So how accurately the index fund follows the benchmark. If you want to follow a specific market, you naturally want an index fund that is as accurate as possible.

‍Factor 6: Currency

‍The currency of the index fund or its investments can impact performance. Does the fund trade in dollars? Then you are dependent on the euro-dollar exchange rate if you want to sell part 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:

• A customized investment strategy
• Having this investment strategy professionally executed for you
• Monitor all your investments 24/7

Experience for yourself how easy investing can be?

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​Please note: asset management is not without risk.