An index fund is an investment fund that aims to provide returns similar to those of market benchmark. This is generally done by investing in the same securities (or a representative sample) as the target benchmark.
What are the benefits of investing in an index fund?
Instant diversification
Diversification is an important investment strategy to ensure your portfolio is not overexposed to certain securities or sectors. An equity index fund may be invested in hundreds of underlying stocks across numerous sectors. For example, if you are invested in an index fund that tracks the S&P 500, you will gain exposure to approximately 500 underlying stocks and 11 sectors that are part of the index
Risk management
A well diversified equity index fund can help remove the impact of individual stock fluctuations, spreading risk across a larger number of underlying holdings. This diversification can reduce the concentration risks of your overall portfolio and leave it less susceptible to individual stock risk.
A transparent approach to investing
When you invest in an index fund, you can have greater visibility into how your money is invested as most major indices will publish the index constituents.
Given active fund managers will often orient their portfolios with a growth or value bias; some index funds offer a style agnostic approach.
Grow your investment over the long term
By investing in the stock market through a market cap-weighted index fund, investors are aligning their investment exposure with some of the most successful and influential companies as they receive the largest weights in the index.
For example, the S&P 500 TR USD has gained about 10.5% on average compounded annually since it was introduced in 1957. Over this period, the effect of re-investing dividends accounted for over 86% of the total return.
S&P 500 TR Index
Source: Bloomberg from March 1957 to March 31, 2024. Values of the S&P 500 TR Index are reported gross of dividends in USD. Indices are unmanaged and cannot be invested in directly.
Conclusion
Index funds are a hassle-free solution that can add diversification benefits to your portfolio and offer greater exposure to the growth potential of markets. Because they are designed to track a particular index, they can take some of the guesswork out of stock picking and allow you to align with overall market returns.
Talk to your Advisor today to learn about Empire Life’s suite of index segregated funds available for you.
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This article includes information that is based on the opinions and views of The Empire Life Insurance Company, as of the date stated and is subject to change without notice. This information should not be considered a recommendation to buy or sell nor should it be relied upon as investment, tax or legal advice. Information contained in this report has been obtained from third party sources believed to be reliable, but accuracy cannot be guaranteed. The Empire Life Insurance Company and its affiliates do not warrant or make any representations regarding the use or the results of the information contained herein in terms of its correctness, accuracy, timeliness, reliability, or otherwise, and do not accept any responsibility for any loss or damage that results from its use.
Empire Life Investments Inc., a wholly owned subsidiary of The Empire Life Insurance Company and is the Portfolio Manager of certain Empire Life Segregated Funds.
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May 2024