How to Know When Index Funds Are Not the Best Deal
Index funds are the gold standard for retirement investing because of their (typically) low cost, built-in diversification, and tax efficiency. But not all index funds are created equal.
As you can imagine, one of the main factors is cost. Personal finance experts offer index funds as part of a low-cost portfolio, but not every fund is cheap. In 2016, Consumer Reports reported that funds tracking the S&P 500 had an expense ratio ranging from less than 0.1 percent to 10 times higher.
As Adam Grossman writes for the Humble Dollar , the popularity of index funds and the desire of fund managers to keep up with demand means you need to remain vigilant when choosing your funds.
There are thousands of different index funds these days, many of which bear similar names, even within the same fund family. Consider the iShares MSCI Emerging Markets ETF and the iShares Core MSCI Emerging Markets ETF. It is easy to confuse them. However, a closer look reveals several differences, including almost five times the difference in annual expenditures.
I’ve noticed the same thing with funds with similar names, even companies like Fidelity and Vanguard.
Another thing to watch out for, advises Consumer Reports, is the minimum investment requirement. “An index fund may require a minimum of $ 500 or up to $ 25 million to invest,” CR says. “An index fund with higher lows is usually aimed at institutional investors.”
To find out what is in your fund (and how much it costs) you can use a financial industry regulator’s tool or read this article for more advice.