Smart index fund investors ask these 3 questions

Index funds have a reputation for being low cost and low maintenance. These traits have helped to make indexing incredibly popular—with equity indexing market share more than doubling over the last 10 years*.

As a result, investors now have a lot of choices when picking index funds. And at first glance, it might seem like funds in the same peer group are basically the same.

But that couldn’t be further from the truth. Every fund is only as good as the investment company that manages it. That’s why smart investors start by taking a hard look at the investment companies that manage their funds.

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Here are 3 important questions to ask when shopping for an investment company—and an index fund:

1. What’s the fund’s long-term track record?

Let’s be honest: You invest for returns. The problem is no one knows how the markets will perform in the future. High returns are never guaranteed, even over time.

But some funds have consistently done better than others, even when tracking the same markets. The key reason: experience. The best index fund companies do a lot behind the scenes to boost your chances of investing success.

Experienced fund companies stay ahead of the competition by:

• Using expertise to impact performance. Excellent fund managers use their experience, market relationships, and understanding of index methodologies to impact performance. For example, the way companies execute certain corporate actions (e.g., mergers, secondaries, IPOs) may result in modest outperformance of a relevant benchmark.
• Keeping costs as low as possible. Low costs are a key advantage of all index funds. But not every index fund company passes these savings along to you in a way that benefits only you.

Smart investors compare long-term performance among similar funds. While index funds don’t try to beat the markets, low costs and strong fund management are usually reflected in the bottom line.

2. Who benefits from my investments?

Your returns should be your index company’s top priority. But not every company is built the same or has the same set of values. Whether you’re saving for a house, a wedding, or retirement, make sure the company’s operating model supports your goals.

Many index fund companies are owned by outside shareholders, which can sometimes create an environment in which you don’t always come first. But there are companies who are structured to create stability, transparency, long-term perspective, rigorous risk management, low costs, and a commitment to clients’ best interests.

Smart investors seek a company that aligns its goals with yours.

3. Can I trust the company?

Index funds are known for low costs, but there are companies who charge a lot of fees--brokerage fees, load fees, management fees, redemption fees, and transaction fees.

Most Americans are unaware of these banking and investment fees that accrue over time. According to a 2018 NerdWallet study** conducted by The Harris Poll, most investors vastly underestimate how much their investments actually cost them.

Smart investors consider the company’s approach to costs across all products, instead of the fees on a single product. After all, doing business with a company you trust makes life a little easier.

The bottom line is that not all index funds are created equal. So when it comes time to trust an index fund company with your hard-earned money, don’t be afraid to ask questions.

You may be surprised to learn that only one company checks all the boxes above. And that’s Vanguard. Vanguard has passed on more than $715 million in estimated cumulative savings to our index fund investors based on assets under management over the last 7 years.† Learn more about why Vanguard funds may be right for you or talk to your advisor.

* Vanguard and Morningstar. All data as of December 31, 2018.

** https://www.nerdwallet.com/blog/investing/financial-fees-study/

†Cumulative figure for all share classes from the 2012 calendar year through the 2018 calendar year for Vanguard’s U.S.–domiciled index mutual funds and ETFs. Estimated savings is the difference between prior and current expense ratios multiplied by average assets under management (AUM). Average AUM is based on month-end assets, which are then averaged over the 12 months of the calendar year. Ending assets are as of December 31, 2018.

For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns.

Vanguard is client-owned, meaning the company is owned by its funds, which in turn are owned by their shareholders.

© 2019 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor.

This content was provided by Vanguard. Kiplinger is not affiliated with and does not endorse the company or products mentioned above.