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Funds 303: Choosing an Index Fund

Introduction to Choosing an Index Fund Know Which Index the Index Fund Follows Know the Tax Effects of Index Funds Know the Costs of Index Funds Summary of Choosing an Index Fund
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Know Which Index the Index Fund Follows

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Know Which Index the Index Fund Follows

Vanguard, Domini, and Schwab all have funds in the large-cap blend category. They all claim to be index funds. But their performance patterns have been very different over the years. What gives? The funds may be large-blend, but they track different indexes. Knowing what index a fund tracks gives you a handle on the risks and returns you can expect and how they differ from other index funds.

Know your options

Thanks to the variety of index funds, you have much more flexibility than decades past, when tracking the S&P 500 was one of the only indexing options. Today, you can build a well-balanced portfolio made up entirely of index funds.

Here are some common indexes; there are various funds tracking these indexes, or some variation on them.

U.S. stock indexes

  • Wilshire U.S. Large-Cap Index: Screens 750 largest U.S. stocks for sales growth and other growth indicators.
  • S&P 500: Screens 500 of the largest U.S. stocks, both value and growth.
  • Wilshire Large Value: Screens several hundred of the largest U.S. stocks for lowest P/E and P/B ratios, and highest yields.
  • S&P 400: measures the performance of 400 mid-sized companies.
  • Wilshire Mid-Cap Index: Screens 501st to 1,000th largest U.S. stocks, following same criteria asWilshire U.S. Large-Cap.
  • Wilshire U.S. Small-Cap Index: Screens 751st to 2,500th largest U.S. stocks, following same criteria as Wilshire U.S. Large-Cap.
  • Wilshire U.S. Micro-Cap Index: Screens the stocks that are ranked 2,501+.
  • Russell 2000: Screens the 2,000 smaller companies included in the Russell 3000 Index.

International indexes

  • MSCI All Country World Index: Captures the stocks of nearly 3,000 companies from 23 developed countries and 25 emerging markets.
  • MSCI EAFE: Captures 85% of market cap and industry for 21 countries in Europe, Australia, and the Far East, excluding the United States.
  • MSCI Emerging Markets: Captures the performance of large-cap and medium-cap companies in 25 countries.

Bond indexes

  • Bloomberg US Aggregate Bond Index: Bonds that are investment grade or higher, with face values more than $100 million, and maturities of at least 1 year.
  • S&P 500 Bond Index: Measures the performance of U.S. corporate bonds issued by constituents of the S&P 500.