That’s a rhetorical question. While its always fun to start out with a riddle, we’ll answer this one.
I’m sure you have heard of the phrase “Index Funds.”
An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover. These funds follow their benchmark index no matter the state of the markets.
That’s why this is the index that is most often quoted in financial articles. Accordingly, an S&P 500 index mutual fund that is intended to track to the performance of the S&P 500, in a low-cost way. As a side-note, we use index funds in our clients’ portfolios.
The Good and the Bad of Using an Index Fund
It’s hard to find something that has great taste and is super healthy and has low calories. There’s generally a give up someplace. With an index fund, there’s a little irony at work.The biggest reason to invest is also the biggest reason to be cautious. The reason to invest is to buy a low-cost fund designed to mirror the performance of the index. That’s great when the markets go up, but it also gives you the same performance when the markets go down, which is not great. Real life case in point: when S&P 500 was down approximately 13.5% in the last quarter of 2018, so was an S&P index fund.
Now Back to the Riddle—When is an Index Fund not an Index Fund?
Not all index funds are created equal, literally. Over the past several years, as index funds have grown in popularity, so have the types of index funds. For example, there are index funds offered for certain sectors of the economy, like financial, or technology. There are bond index funds and there are real estate index funds. There’s even an “Emerging Medical Agricultural Index Fund.” Hidden behind that fancy name, that index fund invests in marijuana stocks.
Associates of Krietzberg Wealth Management are registered representatives of Lincoln Financial Advisors Corp. Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker/dealer and a registered investment advisor. Member SIPC. Insurance offered through Lincoln affiliates and other fine companies and state variations thereof. Krietzberg Wealth Management is not an affiliate of Lincoln Financial Advisors.