Friendly reminder that all my posts are educational only and not specific investment advice.
I recently wrote about red flag fund words that should give you pause before investing in them. Red flag fund names are the equivalent of a guy wearing sunglasses indoors on his dating profile. Proceed with caution. Or simply, swipe left. I’ve told you what to be cautious about, but what should you be looking for? Below are the green flag fund words that you should swipe right on.
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Green Flag Fund Words #1: Index
When a fund has the word “index” in it, it will most likely mean that the fund takes a specific market, like the stock, bond or real estate market and tries to mimic it. Index funds are typically passively managed and focus on a broad part of a market. For example, if a fund indexes against the whole US stock market, it’ll own every single company that publicly trades in the US and will do as well or as poorly as that market does. Investing in an index fund is the “if you can’t beat’em, join’em” strategy. Its a very good and cheap strategy. More expensive actively managed funds will fail to beat the market average and they’ll charge you 10 times more.
Most US domestic index funds average between .03% to just over .20% in fees.
Weighted or Equal Weight?
One way index funds can be different from one another is by whether or not they are weighted. I prefer index funds that are weighted vs. ones that are equal-weight. Further, I like index funds weighted by their market capitalization. When a fund is equal-weight, it will invest equally into all companies in its index. When a fund is weighted, the fund will buy into more of the larger companies and fewer of the smaller ones in its index.
What does Market Capitalization mean?
Market Capitalization is how many shares the company is made up of and what those shares are valued at. For example, if Banana Company has 1,000 shares valued at $100 it has a market cap of $100,000. If Strawberry Company has 2,000 shares valued at $25 a share, it would have a market capitalization of $50,000. In this scenario, Banana Company has twice the “market cap” as Strawberry Company. If a fund was weighted by market cap and indexed against these two companies, we’d want twice as many shares of Banana Company than Strawberry.
Green Flag Fund Words #2: Total
When a fund has the word Total in its name it means that the fund is tracking an entire market. For example, Fidelity ZERO Total Market Index Fund tracks the entire US Stock market. It can also be made up of different securities. For example, Vanguard Total Bond Market Index Fund is made up of a wide range of federal, municipal, corporate, international and mortgage backed securities.
This is a great way to get a lot of diversification across sectors, size and even geographically – and for cheap. A Total US Stock Market fund can be as cheap as .03% to .10%, Total Bond Market funds typically charge a fee of .05% to .20% and Total International Stock Market funds average about .10% to .30%.
Green Flag Fund Word #3: S&P 500
Funds that have the words “S&P 500” in them are likely mirroring the performance of the S&P 500 Index. The S&P 500 stands for the Standard & Poors 500. Its a list of the top 500 companies by market capitalization in the US stock market. I prefer “weighted” funds that index against the S&P 500 for my own personal investing. I personally feel that the top 500 companies in the US is probably the best place to invest my money. These companies are proven winners. Sure, many will eventually go the way of Sears Holdings. As they do they’ll be meted out of this index.
On average, investing in a S&P 500 Index fund will cost you between .03% to .10%.
Green Flag Fund Words #4: Vanguard, Fidelity, Schwab, iShares
Every word in Green Flag Fund Words #4 is the name of a company. They are the names of the leading low cost brokerage and/or fund companies. Vanguard, Fidelity, Schwab, and iShares try to keep costs to a minimum. They compete with each other for investor dollars and are always trying to cut costs. For example, Fidelity offers funds, such as FZROX, for no fee! There are many funds with super low fees below .20% at these fund companies. Funds with Vanguard, Fidelity, Schwab, or iShares in their name will have a low cost focus.
Now, one needs to still proceed with caution. Each of these companies has funds with higher fees. Though these companies are known for their low cost passively managed index funds, each has more expensive options. All of these companies have more expensive funds which are actively managed or use more sophisticated trading methods or strategies. They charge accordingly.
Keeping it Low
When it comes to picking a fund, keep the names listed above in mind. You want the backbone of your portfolio to be indexed, broad, passive and low cost. Pick funds with expense ratios below .25%. Get as close as you can to paying no fees. Fidelity customers can do it with these funds. Every dollar you save from going towards fees will go right towards making you wealthier. When investing, don’t equate paying more to getting better results.
