For many beginner investors. Indexing investing or investing in an index fund is one of the easiest and cheapest ways to get a foot in the market. An index fund is a combined pool of investment funds that tracks a specified market, commodity or sector index.
Active – Passive Indexing Investing
Traditional indexing investing funds are formed using market capitalization. Smart Beta funds is a variation of passive investing by tracking indexes created with slight variation such as fundamental weighted or equal weighted funds.
The most common form of index funds is a market index fund such as SPDR S&P 500 (SPY) which tracks the S&P 500 or the QQQQ which tracks the NASDAQ.
Most index funds are also commonly known as Exchange Traded Fund (ETF) and it is a passive investment. This means that once the decision is made to invest in a particular index fund, the fund manager does not have any active input in the investment process.
Some other examples of investments which are tracked by indexes includes:
1. Asset class indexes such as commodities like Oil or REITs.
2. Countries such as Russia, India or broader regional funds like emerging markets.
3. Sector exposures such as Housing or Medical Devices ETF.
4. Funds that tracks particular Investment styles such as value, growth or momentum.
Advantages of Index funds over active management includes:
– Index funds are low cost options.
– most index funds are listed so there is intraday liquidity for investors that wish to trade around a position.
– much more variety of investment options. There are so many ETFs that tracks every conceivable asset class or market. Active management is best for most common or largest asset classes.