Index funds are one of the world’s fastest growing investment products. Almost US$6 trillion was invested worldwide in internally managed index assets at June 30, 2011 – a record 1.
More investors are using index funds for low-cost exposure to various asset classes such as equities, fixed interest and property in Australia and overseas.
Increasingly, investors are combining index funds with active managed funds in portfolios, to enhance diversification, help mitigate risk and better manage after-fee performance.
How index funds work
Index funds track indices, and are managed by their investment manager to mirror the return of an underlying index, such as the S&P/ASX 300 Accumulation index, minus fund costs.
An index fund aims to hold the index constituent securities at their index weight, or a representative sample depending on factors such as the size and complexity of the index. Index funds are based on a unit trust structure, where investors contribute money and are issued units in the fund.
Returns on index funds can be enhanced marginally by the expertise of the investment manager, to portentially reduce the effect of fees.
1Pensions and Investments Largest Index Managers Survey 2011.
