What is index investing?
Index investing, also known as passive investing, is one of the simplest, lowest-cost, and most effective ways to grow your wealth over time. It’s a strategy used by everyday investors and billion-dollar investment management firms alike, and it’s gaining popularity fast in Australia.
Rather than trying to pick winning stocks (and avoid the losers), index investing lets you own a broad mix of companies through one simple investment. It takes the guesswork out of investing – and lets the market work for you, reallocating your mix of shares based on what the winners and losers are.
How do indexes work?
An index is a group of companies bundled together to represent a part of the stock market. For example:
- The ASX 200 tracks the top 200 companies in Australia.
- The S&P 500 tracks the 500 largest companies in the U.S.
When you invest in an index fund, you’re buying a small piece of every company in that index. So instead of trying to pick which stock will do best, you’re betting on the entire market growing over time.
Are index funds safe?
No investment is 100% risk-free, but index funds are generally considered less-risky ways to invest in the share market.
Here’s why:
- They offer broad diversification, which reduces risk
- They’re low cost, which means more of your money stays invested
- They’re transparent, tracking publicly available indexes
- They’ve historically delivered strong long-term returns
Importantly, index funds don’t try to beat the market like active fund managers would, they just aim to match it. This is why they are often referred to as passive funds or passive index funds. History shows that this strategy outperforms most active fund managers over the long run.
Do index funds pay dividends?
Yes, some index funds pay regular dividends, based on if the underlying holdings are dividend paying companies.
If the companies within the index pay dividends, those cash payments are passed on to you. Most index fund investors choose to automatically reinvest their dividends to buy more units, helping their investment grow even faster through compounding.
What are S&P 500 index funds?
S&P 500 index funds track the performance of the 500 largest listed companies in the United States, including firms like Apple, Microsoft, and Amazon.
They’re a favourite among index investors because:
- They offer exposure to the world’s most powerful companies
- They’ve delivered strong long-term growth
- They’re very low-cost to invest in
Popular ETFs in Australia that invest in the S&P 500 include iShares Core S&P 500 ETF (IVV) and SPDR S&P 500 ETF (SPY). IVV is one of our chosen ETFs in the Stockspot Global Shares Theme.
What is the difference between an index fund and an ETF
Index funds are a broad category of investments that aim to track the performance of a market index, like the S&P 500 and S&P ASX/200. They include both exchange traded funds (ETFs) and unlisted index funds. The main difference between the two is how they’re bought and sold. ETFs trade on stock exchanges during the day just like shares, with prices that move based on supply and demand. Unlisted index funds, on the other hand, are priced once a day and can only be bought or sold at their end-of-day net asset value (NAV).
How can I start index investing in Australia?
Getting started with index fund investing in Australia is easier than ever. You can:
- DIY with ETFs: Open a brokerage account and buy index ETFs like VAS, IVV, or IOO yourself.
- Get a personalised ETF portfolio built and managed for you (like those we offer at Stockspot): We build and manage a low-fee index portfolio for you, based on your goals and risk level. No stock picking. No stress.
Stockspot portfolios are built using a diversified mix of ETFs, across Australian shares, global shares, bonds, and gold. This means you get the full benefit of index investing, without having to pick your funds or manage your asset allocation.
Index investing is a simple strategy for Australians who want to grow wealth without guessing the market.
Whether you’re just starting or already investing, index funds offer low fees and offer broader access to the market, over picking individual stocks.
