Table of Contents
What Are Index Funds?
Index funds are a low-cost way to invest in the stock market using a passive investment strategy.
Index funds operate by exposing investors to a basket of securities in different markets by tracking certain indexes.
Investing in a market index is an excellent way to gain diversity in the stock market instantly and particular index funds give you exposure to various assets, including commodities and bonds.
Index funds can be classified into Mutual funds and ETFs.
The equity investments are subject to market risks and may not be suitable for all investors. If you have any doubts as to the merits of an investment, you should seek advice from an independent financial advisor. So please invest at your own risk.
What Are Mutual Funds?
A mutual fund is a fund run by a professional that pools investor funds and uses these funds to invest in particular securities in the stock market.
A mutual fund is primarily designed to track the underlying index of a certain class of assets and its primary goal is to outperform the market, especially the actively traded ones.
A mutual fund can be actively or passively managed.
Actively Managed Funds
Actively managed funds are run by fund managers who pick the individual stocks the fund acquires.
The stocks are chosen in line with the particular investment strategy being executed by the mutual fund.
Actively managed funds have higher costs compared to their passive counterparts in part due to the management fees paid to the fund managers.
Risks are always present even when investing in mutual funds and investors must take into account their investment goals and risk tolerance when selecting a suitable fund to invest in.
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Passively Managed Funds
Passive mutual funds are designed to match the underlying index.
This means that they come with lower management fees than their actively managed counterparts.
How to Invest in Index Funds
If you want to buy index funds and create a well-diversified portfolio, you must research the best low-cost index funds.
If you go to a financial advisor, they may recommend the high expense ratio funds, which will cost you more over time.
Investing in index ETFs is an excellent way to gain exposure to the Canadian equity market.
Still, you must understand how to find the funds with the cheapest management expense ratio.
Index investors can easily overpay for ETFs just for choosing a fund with high expenses.
The Best Canadian Index Funds
Vanguard FTSE Canada All Cap Index Fund (VCN)
The Vanguard FTSE Canada All Cap Index Fund gives investors exposure to small, mid, and large-cap Canadian equities. With this diversified index fund, Canadian investors can take advantage of the long-term growth of companies of all sizes.
The management expense ratio for this fund is 0.05%, making it one of the best low-cost index funds available from a mutual fund company. This fund’s assets also pay generous dividends as the yield is over 3%.
iShares Core S&P U.S. Total Market Index Fund (XUU)
If you want to start investing as a beginner, index investing is a fantastic place to start. Some of the best index funds mirror the entire stock market and are called total market index funds.
Total market index mutual funds are an excellent passive strategy because of their pure diversity. Additionally, since the fund manager doesn’t have to do much work, they are low-cost investments. The iShares Core S&P U.S. Total Market Index Fund has a low expense ratio of just 0.08%.
iShares U.S. IG Corporate Bond Index CAD-Hedged (XIG)
The iShares U.S. IG Corporate Bond Index Fund allocates its capital to investment-grade corporate bonds. Equities generally provide higher returns than fixed-income securities like bonds, but many investors like to diversify outside of equities. Additionally, as people near retirement, they should take less risk, which is why bonds are popular with older folks.
This fund has an expense ratio of 0.32%, which isn’t great, but it is managed by the well-known investment company Blackrock. Therefore, investing in this fund ensures your capital is in the hands of experienced fund managers.
TD Canadian Equity Index Fund (TTP)
The TD Canadian Equity Index Fund is a low-cost way to gain exposure to a broad-market Canadian index. The fund pays a yield of over 3% and trades at a P/E ratio of just 12, making it an excellent fund for value investors.
This fund comes with a low MER (management expense ratio) of just 0.04%, making it one of the cheapest mutual funds on the market. Its inception date was March 21st, 2016, and it has provided a return of over 70% since.
Vanguard Conservative Portfolio Index Fund (VCNS)
The Vanguard Conservative Portfolio Index Fund invests its capital with a 60/40 investment strategy. 60% of the portfolio is invested in bonds and the other 40% in equities. This investment style is considered conservative since bonds are fixed-income securities with much lower risk than equities.
The management expense ratio for this fund is 0.24%, which is relatively average. Generally, bonds are inversely correlated to stocks, meaning as stocks go down bonds should theoretically go up.
Why Invest In an Index Fund?
Investing in index funds comes with several advantages including:
They’re great for long-term investment strategies as volatility in the short term gets evened out over time.
Many of them pay out dividend incomes to investors, creating an alternative source of income while saving the investor time they would otherwise have spent choosing a dividend stock.
If your looking to increase your retirement savings using a TFSA or RRSP, investing in an index fund is a good idea.
Low MERs and No commissions are trademark features of most of the best index funds in Canada.
As a new investor finding time to do market research on every single stock is a very arduous and time-consuming process.
This is why it makes more sense to just acquire an index fund.
Overtime indices are known to increase, and over a long enough time horizon, index funds become lower-risk investments.
By doing so you not only save time and minimize your investment risks but also potentially create a stable source of income.