Also known as equity funds, these funds follow the market indices (Dow Jones, Nasdaq, S&P500). Basically, they are mutual funds with lower MERs. The reason you pay less is due to minimal fund activity. Instead of buying and selling all day long like most mutual funds, index funds just hold the averages. Commission fees are close to none and less activity implies one manager can take on multiple index funds, thus reducing the management fee per fund.
So what’s the catch? There is none… but that is up for debate. Some argue that, since index funds are less active, they are at the mercy of the market indices whereas actively traded funds can sidestep market declines if they are nimble enough. The issue with that logic is that, in reality, money managers are not perfect. Oftentimes, holding is a lot more profitable than trading in and out of the market.
- Lower MER
- No responsibility (no homework)
- Some argue that your money is not safe when nobody is actively managing it
- Note that these people are often managers who will profit more if you invest with them instead