Indexing allows the investor to be more diversified than a traditional stock portfolio. Most common index funds, such as Vanguard 500 (VFINX), iShares Russell 1000 Value ETF (IWD), iShares Russell 2000 Value ETF (IWN), and etc., purchase companies represented in each index. These funds achieve the kind of diversification not feasible with an individual stock portfolio. An individual attempting to mimic a broad index, such as the S&P 500 or the Russell 1000, would incur thousands in trading costs.
Index funds have fared well compared to active managers in longer investment periods. However, in certain shorter investment periods, some active managers have done well.
With more and more index funds and index-based ETF’s emerging, the expense ratios of these funds have gotten very competitive. Some of the Vanguard funds have expense ratios low as 5 basis points.
Also, due to the passive nature of these funds, they tend to bevery tax efficient.
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