Stocks of the mutual funds and ETFs that track and follow the performance of a stock market index are termed as index stocks. Index stocks provide diversification to the investment portfolio by spreading out investments across different asset classes. They also manage and balance risks in an investment portfolio.
Index stocks track a particular index and are not actively managed. Therefore, the expenses to manage index funds are minimal, leading to a low expense ratio. Index stocks follow a low-risk low-returns profile and are ideal additions to the portfolio for investors looking for lower risks and stable returns.
Factors to Consider Before Investing in Index Stocks
Investors must consider that index stocks do not generate very high returns. They passively track the performance of underlying indices and may not be able to replicate the exact performance due to tracking errors. Therefore, for optimum returns, investors must consider index stocks with minimum tracking error.
Moreover, the cost of investment is also a significant factor to be considered. The index funds with low expense ratios tend to generate higher returns due to lower costs of investment. Additionally, investors must also track the past one, five, and ten years returns of index stocks to get an approximation of the expected returns from index funds.
Which Index Stocks Should I Buy?
Numerous index funds and ETFs trade on the US stock exchanges. They track the performance of specific indices and generate returns accordingly. We have compiled a list of the best index stocks for you to select from.
Investors must consider their investment horizon, financial goals, risk appetite, and return expectations before investing in specific index stocks. A low expense ratio remains one of the most critical criteria. Investors can also choose the sector, industry, asset class, and geographical location that they want to focus their investment on.