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Index funds provide a simple way to begin your investing journey. We recommend a hassle-free, 'set it and forget it' approach, which you can establish once and enjoy the long-term rewards. Index funds are a key component of this method. When selecting one, Consumer Reports highlights a few key factors to keep in mind.
We've already covered how to get started with index funds and the process of selecting one. However, Consumer Reports points out several important considerations. One major factor to look at is the fees—most index funds have impressively low expense ratios, typically under 0.1 percent.
Another critical factor to examine is the fund’s tracking error. Here's an explanation from Consumer Reports:
This number indicates how closely the fund’s performance aligns with that of the index. Several factors, including the fund’s fees, can cause a deviation from the S&P 500 Index’s performance. Bryan suggests a general guideline: the tracking error should be nearly equal to the fund’s expense ratio.
You can find this information on Morningstar.com, Yahoo Finance, or Google Finance. Simply check the fund’s performance and compare it to the index it aims to replicate. Consumer Reports offers a deeper dive into what to look for, so be sure to check out their full article. For additional guidance on getting started, take a look at our primer.
Photo by OTA photos.
