A Dow Jones Index fund offers investors an easy way to take advantage of market returns without having to select individual stocks. The most common such funds track the Standard and Poor’s 500, but you can also buy funds tracking the 30 companies in the Dow Jones Industrial Average or a specific sector of the market. How you make a purchase depends on the type of fund you wish to buy.
Pick Your Type
There are two ways to invest in stock funds -- mutual funds or exchange-traded funds. Mutual funds are bought and sold through the fund company. Fund shares change prices only at the end of the day, and trading generally comes with restrictions. There usually are limits to how frequently you can make trades, and you can’t buy index funds on margin, sell them short or use stop orders, limit orders or open orders. ETFs operate similarly to a mutual fund, except they can be traded like an individual stock.
Buying Mutual Funds
To buy an index mutual fund, set up an investment account or an individual retirement account with a brokerage that has funds you’re interested in. You can do this online by going to a brokerage website, or over the phone or through the mail if that makes you more comfortable. You'll need to fund the account before making a purchase. If you’re buying funds that the brokerage manages – like Vanguard funds from a Vanguard account – your fees will be lower than if you mix and match funds from different brokerages.
Investing in ETFs
Purchasing an ETF is similar to buying a mutual fund in that you have to set up an investment account to make the trades. However, the value of an ETF is pegged to the combined value of the stocks within the ETF. You can make trades as you would any other stock -- selling the ETF short, moving in and out of an ETF quickly, trading on margin or using other more-sophisticated investment strategies. Each trade generally comes at a price, so they can wind up being more expensive to maintain if you rebalance your portfolio frequently.
Check the Costs
Since an index fund doesn’t require a sophisticated money management strategy, you shouldn’t be paying a lot of fees to invest in one. Check your index fund’s management costs before investing, since those costs effectively lower your rate of return. Take into account the total costs of investment. For example, if there are fees for each new inflow added to the investment or an annual fee that occurs if you drop below a minimum balance, factor that into your considerations.
Watch Your Weights
Before investing, also check how the index fund is weighted. A cap-weighted index, for example, selects its mix of stocks based on the value of the companies in the portfolio. If a company’s market cap equals 10 percent of the value of stocks in a particular index, it would make up 10 percent of the index fund’s value. An equal-weighted index has the same proportion of stock among all its securities, even if it’s split between large caps and small caps. Other funds weight their options based on different fundamentals, such as book value or revenue. These weights can make the performance of index funds differ. For example, a cap-weighted index generally has less volatility because of its emphasis on bigger companies, while the equal-weighted index can be a better way to take advantage of smaller companies taking off.
- Forbes: Another Reason to Buy Index Funds
- Forbes: Everyone Says Buy Index Funds, But How Do You Pick The Right Index?
- Chicago Tribune: Buying an Index Fund? Is a Mutual Fund or ETF Right For You?
- U.S. News & World Report: 5 Ways to Navigate the Index Fund Maze
- Forbes: Index Funds vs. ETFs – Get the Facts
- Vanguard: Buying an ETF
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