As a beginner investor, you have a choice of various ways to invest. Index investing is a popular form of this. You follow the market without actively participating. In this module, you’ll discover exactly what index investing is and how you can do it.
What does index investing mean?
Index investing is a strategy where you invest in a basket of stocks or other financial instruments from different companies within one group: the index (or indices). You can think of it as a basket with different types of fruit like apples, bananas, and strawberries. This ensures good diversification of your investments without buying separate stocks, thereby spreading the risk.
Not a BUX investor yet? Create your account
What is the goal of index investing?
The goal of index investing is to track the return of a specific index, not to beat it (which is the case with active investing). That’s why it is also called passive investing. It is a passive investment strategy that reduces the risk of individual stocks by investing in a wide range of companies within an index. You don’t need to perform complex analyses or actively monitor the market, making it a suitable strategy for starting investors.
Read more: What can you invest in?
Which indices exist?
There are many different indices you can choose from. There are indices for countries, sectors, or themes. Think of a global index, a sustainable energy index, or an AI index. Let’s look at the most well-known indices.
1. AEX
The Amsterdam Exchange Index (AEX) is the most important stock index in the Netherlands. This index falls under Euronext Amsterdam and tracks the performance of the 30 largest listed companies on the Amsterdam stock exchange. AEX is also referred to as large cap, a reference to the large companies that are part of the index.
2. Dow Jones
The Dow Jones Industrial Average (DJIA), or simply ‘Dow Jones’ or ‘The Dow’, is the most well-known and oldest American index. This index consists of thirty large, publicly traded companies listed on the New York Stock Exchange (NYSE) and the National Association of Securities Dealers Automated Quotations (Nasdaq).
3. Nasdaq Composite
The National Association of Securities Dealers Automated Quotations (Nasdaq) is an American exchange and one of the largest stock exchanges in the world. Mainly stocks of technology companies are traded on this stock exchange. It is a fully digital system that automatically displays and trades stock prices. As a result, no physical trading floor is needed.
3. S&P 500
The Standard & Poor 500 (S&P 500) tracks the performance of the 500 largest listed companies in the United States. This index covers around 80% of the American market, making it a reliable reflection of the US stock market.
4. MSCI World
The Morgan Stanley Capital International (MSCI) World tracks stocks of various companies from 23 developed countries, including the Netherlands. The index covers approximately 85% of globally listed companies. The counterpart is the ‘MSCI All Country World Index’ which tracks emerging markets.
5. EURO STOXX 50
The EURO STOXX 50 is a European stock index based on the 50 largest listed companies from 11 countries. The index is seen as an important barometer for the performance of the Eurozone economy and includes well-known names from various sectors.
The pros and cons of index investing
Index investing offers many benefits, such as low costs and diversification, but also has points to consider. Let’s look at the main advantages and disadvantages of this investment strategy.
The advantages of index investing
- Cost-effective: Index investing requires no active fund managers, which lowers costs. This means you can keep more of your return.
- Smart diversification: By investing in an index, you get direct access to hundreds, if not thousands, of different companies. This reduces the risk of being completely dependent on the performance of a single company.
- Simple: Index investing is relatively easy to understand and requires little knowledge of the market. You don’t need to analyse individual stocks, making it attractive for beginner investors.
- Higher return: Index investing can yield a higher return in the long term.
The disadvantages of index investing
- No extra profit: Because you follow the market, you can never achieve a better return than the index itself.
- Market risk: If the broader market falls, your index funds will also decrease in value. Despite the diversification, there is always a risk of loss.
- Less control: You have no influence on the composition of the index. If a company appears in the index that doesn’t appeal to you, there is little you can do about it.
You cannot buy an index yourself. Instead, you must open an investment account with a bank or broker, such as BUX. You can then deposit money into one or more index funds and Exchange Traded Funds (ETFs). With both forms, you can invest passively, yet there is a difference.
- Index fund: You can enter or exit once a day at the value of the index at the end of the trading day.
- ETF: You can buy and sell throughout the day at the current price, based on supply and demand. This makes ETFs more flexible than index funds.
What does index investing cost?
The costs of index investing vary. You pay both annual fund costs (the Total Expense Ratio (TER)) to the fund manager and transaction costs to the bank or broker. The TER is usually between 0.1% and 0.5%, depending on the fund. You pay this percentage annually on the total value of your investment to the fund manager. Transaction costs are the fees you pay to the broker or bank to execute the purchase and sale of the index funds or ETFs. This is often a fixed low amount per transaction.
What is the risk of index investing?
The main risk of index investing is market risk. If the market falls, index funds fall too. This also applies to other investment products. Additionally, an index fund can intervene less quickly during market downturns than active funds, and you cannot choose between different stocks. In the latter case, it may therefore be that you invest in a company that doesn’t suit you.
Is investing in an Exchange Traded Fund or index fund wise?
Investing in an ETF or index fund can be a good choice for starting investors looking for a simple way to invest to build wealth. It is an accessible entry point, as you don’t have to choose stocks yourself or actively follow the market. Furthermore, it is an excellent option if you want to invest in specific categories, sectors, or regions, without having to deposit a large amount. Finally, you can ensure broad diversification to spread risks.
Read more: What type of investor are you?
How can you start index investing?
You can easily start index investing via a broker, such as BUX. With us, you can invest in ETFs, where you can choose from various options that fit your goals.
Want to make it completely simple? Choose the BUX Investment Plan. On our user-friendly platform, the BUX app, you can set up your investment plan in a few steps. Choose the amount you want to deposit every month, starting from just €10, and select the ETFs that suit you. We ensure that your deposit is automatically invested. All you have to do is pick a day of the month and set your goal. This way, you work on your returns simply and structurally.
Are you ready to learn more? Go quickly to the next module.
Not a BUX investor yet?
Create your account in a few minutes and start building your wealth.
Investing involves risks. You can lose your investment.
All views, opinions, and analyses in this article should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
