I've written quite a bit about taking charge of your own retirement by opening up an IRA and making regular contributions. But what if you're like a lot of people and are scared to try to pick individual stocks or bonds? Maybe you just don't want to put in the time it would take to properly research individual companies. If this sounds like you (and there's nothing wrong with that!), index funds may be the way to go for your portfolio.
What is an index fund?
In a nutshell, an index fund lets you invest in many companies -- sometimes hundreds or thousands -- that are part of the same "index." An index is simply a collection of stocks that have something in common. Some indexes represent companies of a certain size, like the Vanguard Mid-Cap ETF (NYSEMKT: VO ) , which tracks stocks with market capitalizations in the 70th through 85th percentile. Other indexes track stocks in certain industries, such as the iShares U.S. Financials ETF (NYSEMKT: IYF ) . And some, like the SPDR S&P 500 (NYSEMKT: SPY ) , track well-known exchanges.
Many index funds are weighted, meaning they hold more of the larger companies in the index and less of smaller companies. For example, the aforementioned financials index has 6.7% of its assets in Wells Fargo, which boasts a market capitalization of $268.8 billion, but just 2.1% in U.S. Bancorp, which is currently valued at $77.7 billion.
There are far too many index funds to examine them all, but here are some of the best choices to help get you started, as well as their historic performance, top holdings, and reasons you might want to buy (or avoid) each one.
Are these dividend stocks a better way to go?
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