Index investing is where investors seek to match the performance of a market index, like the S&P 500 or the S&P/NZX 20 index.
The index sets the rules of which investments an index fund manager (that’s us) can include in the index fund.
An index fund is built to essentially run within a pre-defined rule set. Index fund managers generally believe two things:
- it is difficult to out-think the market; and
- that market inefficiency isn’t significant enough
Based on these beliefs, they try to match the index performance.
Index investing also broadly refers to a buy-and-hold strategy, with minimal trading in the market. This means it is cheaper, as index fund managers seek to avoid the research and transaction costs that are incurred with frequent trading.
Index investing is in contrast to active investing, where fund managers select individual investments based on their own research in an attempt to beat the benchmark. The problem with this is the extensive research showing it’s incredibly hard to do consistently and often does not work.
If you want to do a deep dive into the world of indices you can do so here.
Keen to learn more? Here’s a short watch answering why you would choose index investing over active investing. You can also find out more about S&P Dow Jones Indices, who are our indices provider, here.