So, you’ve heard me talk about broad-based index funds in several posts, and yet you have no idea what I’m talking about, right? Today we are going to clear up the confusion for you. There are many different types of index funds out there. However, when it comes to managing the portfolio, we typically see broad-based index funds being held by individual investors more than any other type of investment.
I’m a huge fan of index funds, especially for investors who don’t have the time to research the various stocks they want to buy. That being said, in this article, we are going to discuss a few different things.
What We Will Teach
- What Is A Broad-Based Index Fund
- What Are Some Examples Of Broad-Based Index Funds
- Where You Can Purchase Broad-Based Index Funds
What is a Broad-Based Index Fund
Here is the most simple explanation of a broad-based index fund: something that is built to mirror an index such as the S&P 500, Russell 3000, or the NASDAQ Composite Index. Each of these indexes represents different aspects of the overall market at large. Of the three, the S&P 500 tends to be the most talked-about of the indexes.
So what is the S&P 500? This is also known as the Standard & Poor’s 500 Index, and it represents about 80% of the American market capitalization. The exciting thing about the way Standard & Poor tackles this specific index is that it is also a weighted average. What that means is simply, the larger companies make up a larger portion of the index.
Top 5 Companies by Market Cap
- Apple – which has an index rating of around 6.7%
- Microsoft – which has an index rating of around 5.6%
- Amazon – they have an index rating of 4.4%
- Facebook – A 2% index weighting
- Tesla – The newest company to hit the S&P 500 and is 1.9% of market weight
As you can see, the top 5 companies alone make up over 20% of the total market weight of the S&P 500 index based on their overall size. This is what it means when they say that the index is made up of the weighted average.
You cannot invest in indexes themselves - indexes are simply snapshots, if you will, of how a group of companies are performing.This is where index funds come in!
Now that you understand what indexes are and more importantly what a broad-based index is, let’s talk about broad-based index funds. A broad-based index fund tries to emulate the particular index it is following. No one can invest in the S&P 500. However, you have the ability to invest in funds that mirror it. Many companies replicate the S&P 500 (and other indexes) by building out their own proprietary index funds, making it possible to mimick the returns of the index itself.
The first person to do this was “Jack” Bogle when he created the firm Vanguard back in 1975. This was built for the average everyday investor who didn’t have a team of analysts doing the research for them day in and day out to buy and sell for a profit.
Tony Robbins talked about how the S&P 500 outperforms 95% of mutual funds over a 10-year time horizon in Money: Master the Game. Not only does it exceed these other investments on their returns, but they also do it for pennies on the dollar.
What Are Some Examples Of Broad-Based Index Funds
I will talk about a few different examples of these funds and the companies that created them.
Vanguard
Vanguard offers the Vanguard Total Stock Market Index Fund or VTSAX.
This is a fund that is often touted in the FIRE community as it has a primary goal of investing in the overall U.S. market as a whole. It is your one-stop-shop when it comes to investing in equity markets.
If you click on the link above, you will see that you’re investing in 3,640 different stocks, giving you the ability to significantly diversify your risk. So why is that important?
Well, if you invest in just one stock, the chances that it will go to zero are much higher than when you’re invested in 10. To have 3,640 different companies fail all at the same time is highly improbable. This fund also only costs on average 0.04% for the expense ratio (the fee you’d typically pay for the fund).
Another Vanguard fund that many people own is the Vanguard S&P 500 ETF or VOO. This investment is built to mirror the S&P 500 returns each year. The nice thing about investing in an ETF like this is that your expense ratio is only 0.03%. That means for every $10,000 you have invested, you pay roughly $3 in expenses.
Fidelity
Fidelity is another excellent company to look at when you want to invest in low-cost index funds. Similar to Vanguard, Fidelity offers a variety of different ETF and broad-market-based index funds. Let us take a look at a couple similar to the above.
Fidelity Total Market Index Fund or FSKAX is nearly identical to the Vanguard VTSAX. Their main goal with this fund is to track the total return of a broad range of U.S. based stocks, and they do that for a 0.015% expense ratio.
This gives you access to a broad range of total stocks that are out there. The beauty of a fund like this is that you now have over 3,000 companies working to put money into your pocket. Not only that, you don’t have to pay the hefty fees of buying and selling the stocks, and you can potentially keep your taxes down through IRAs or by investing for the long-term.
The second fund we will take a look at here is the Fidelity S&P 500 Fund or FXAIX. Again, this is focused on an index-weighted match of the S&P 500, just like with the Vanguard fund. You are invested in 500 different companies that help diversify your overall risk and spread it out over several other companies actively working to make you money.
This is important because you’re not putting all of your eggs into one basket. You are hedging some of your bets here, and as we stated before, the index has outperformed 95% of mutual funds over a 10-year time frame. It also does it for an expense of only 0.015%.
A Word Of Caution
I am not saying these Index Funds are the only investments that you should make. I am stating that these types of broad-based index funds can provide you stable returns over a 10, 20, and 30-year time horizon without having to buy and sell like a day trader. It is as close as you can get to a “set it and forget it” mentality.
I talk about the power of dollar-cost averaging and systematic purchases and automating your way to wealth in other posts. Still, it is a great way to buy into these funds on a bi-weekly, monthly, or annual basis.
Where To Buy These Index Funds
Now we are going to talk about 4 different firms from which you can buy these investments. This is not an all-inclusive list. However, these are four firms that I have worked with in some form or fashion in the past, don’t charge excessive fees to buy these funds and allow you to purchase other types of investments.
Vanguard
Vanguard is the original Index Fund company out there. I am a big fan of Vanguard as it is a company that is loved amongst the FIRE (Financial Independence Retire Early) community. You can look at several different funds they offer, from Stocks to Bonds and even international.
Fidelity
Fidelity is a great company as well. They make similar ETF Index Funds as Vanguard and offer them at a lower cost. I would argue that the charges at this point are negligible in the grand scheme of things, and they are a company that puts their clients first.
TD Ameritrade
I really like TD Ameritrade. I honestly love their investment platform, Think or Swim. At TD Ameritrade, you can buy any of the above ETFs you want. You can also use their Think or Swim platform and education tools to learn to trade while using a play account. They also offer many of their stocks at no cost.
Charles Schwab
The last one I will touch on is another discount brokerage, Charles Schwab. They have their own funds that you can purchase as well, and their fees are just a hair under Vanguard’s and over Fidelity’s own. Again, when you’re looking at expenses that are as low as this, they become negligible.
The four different firms above are great choices to take a look at. Any of the companies above can help you get started buying some of the Index Funds we mentioned. They can also help you get into stock and bond trading if that is something you desire. Most have a plethora of information that you can make use of as well and level up your trading skills.
Final Thoughts
We covered a lot of ground in this post. We went through not only what a broad-based index is but also some of the funds that mimick it for returns. We discussed two critical Vanguard Funds and two essential Fidelity funds that you can build into your portfolios for stable returns and low-cost strategies. With the increased diversification, you will hopefully see less volatility in your overall portfolio structure.
The last thing we discussed was the top discount brokerages from which to purchase the Vanguard and Fidelity funds we spoke about.
It may be helpful to note briefly that there are a many different kinds of index funds aside from broad-based that we can talk about in future posts. Here are just a few examples:
- Sector index funds deal with investments made in one particular industry (like healthcare for example).
- Commodity index funds are investments in a particular commodity (like gold, silver, oil, etc.)
- International index funds deal with investments made in foreign markets.
If this information was valuable, or if there’s a topic you’d like to see me write about, please leave a comment below.
Stay Happy.
Renae
Disclaimer: Just My Little Mess does not provide tax, investment, or financial services and advice. The information is presented without considering the investment objectives, risk tolerance, or financial circumstances of any specific investor. It might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.