Index funds are an easy way to get started with investing. We’re fans of an easy, “set and forget” portfolio that you can set up once and benefit from over time, and index funds are the backbone of this kind of investing. When it comes to picking one out, Consumer Reports suggests a few traits to consider.
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Consumer Reports makes some important points about what kind of things to look out for when choosing an index fund. Fees are an obvious one, and most index fund fees (or expense ratios) are gloriously low.
You also want to consider the fund’s tracking error. They explain:
This number shows how closely a fund’s performance mirrors the index. Funds can deviate from the S&P 500 Index’s performance for a number of reasons, including the fees a fund charges. But Bryan says the rule of thumb is that the tracking error should be close to the fund’s expense ratio.
You can find this info on Morningstar.com, Yahoo Finance or Google Finance by looking at the fund’s performance and then comparing it to the index it’s supposed to mirror. Consumer Reports has more detail about what to look into, so check out their full post below.
How to Choose an S&P 500 Index Fund [Consumer Reports]