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Index funds

Indexes - or indices - are collections of selected stocks or other investments. Some of the best known indexes include the S&P 500, which tracks the share price performance of the 500 largest companies listed on the US exchanges, or the ASX 200, which tracks the largest 200 companies listed in Australia. But there are also indexes that track sectors and industries, like technology or clean energy, as well as bonds, IPOs, currencies, growth stocks and more.

Index funds track these indexes, allowing investors to track their performance. They do this by allowing to buy a basket of shares that matches the composition of the index with just a single trade, rather than trying to buy all the stocks in a given index individually.

Index funds can be bought as either exchange-traded-funds (ETFs) or as mutual funds, but ETFs will almost always have lower costs and can be bought and sold on the CMC Markets Invest platform like any other share.

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Advantages of index funds

  • Diversification: Index funds allow you to add potentially hundreds of stocks to your portfolio in a single trade.
  • Mitigated risk: Because their goal is passively tracking an index rather than outperforming it, index funds are generally seen as a lower-risk investment.
  • Low-cost: As well as allowing you to pay brokerage on just one trade instead of money, index funds keep costs low. Index fund management feeds tend to be significantly lower than actively managed funds.

Disadvantages of index funds

  • The returns on high-performing stocks in your portfolio can be blunted by losses on your lower-performing stocks.
  • Some index funds can have tracking errors, meaning the fund's performance doesn't match that of the index it is tracking.

How to identify the best index funds to invest in

The two most important metrics of index funds are their performance and their costs.

Past performance is no guarantee of future success, but it does indicate recent market sentiment.

The costs of managing an index fund is captured in its expense ratio. For ETFs, these can be as low as 0.03% annually. This means that for every $10,000 invested, you would pay $3 in annual fees.

List of the best-performing index funds

Below are the top-performing funds according to a share price increase over the past five years, as of early October 2021. Only funds with at least an average daily volume of 100,000 trades are included.

QCLNFirst Trust NASDAQ Clean Edge Green Energy Index Fund​326%​
TAN​TAN Invesco Solar ETF​321%​
SOXX​SOXX iShares Semiconductor ETF​​316%​
IBUY​IBUY Amplify Online Retail ETF​​301%​
LIT​LIT Global X Lithium & Battery Tech ETF​​268%​
IYW​IYW iShares U.S. Technology ETF​​256%​
SKYY​SKYY First Trust Cloud Computing ETF​​216%​
QQQ​QQQ Invesco QQQ Trust​​214%​
FINX​FINX Global X FinTech ETF​​210%​
IPO​IPO Renaissance IPO ETF​​203%​

List of low-cost index funds

Here are the index funds with the lowest expense ratios. Only funds with at least 100,000 share daily average volume are included. Only one fund from each category is included. 

IVViShares Core S&P 500 ETF0.03%
VTIVanguard Total Stock Market ETF0.03%
SCHXSchwab US Large-Cap ETF0.03%
VTVVanguard Value ETF0.04%
VUGVanguard Growth ETF0.04%
SPDWVanguard Mid-Cap ETF0.04%
USIGiShares Broad USD Investment Grade Corporate Bond ETF0.04%
VEAVanguard FTSE Developed Markets ETF0.05%

Australian index funds

Below are the top-performing funds listed on the ASX, according to a share price increase over the past year, as of mid-November 2021.

OOOBetaShares Crude Oil ETF Ccy Hgd(Synth)​131%
LNASETFS Ultra Long Nasdaq 100 Hedge​117%
GGUSBetaShares Geared US Eq Ccy Hdg ETF​112%
FUELBetaShares Glb Energy Coms ETF-Ccy Hdg​77%
GEARBetaShares Geared Australian Equity ETF​66%
BNKSBetaShares Glb Banks ETF-Ccy Hdg​62%
ACDCETFS Battery Tech and Lithium ETF​56%
MVBVanEck Australian Banks ETF​55%
HACKBetaShares Global Cybersecurity ETF​51%
VVLUVanguard Global Value Equity Active ETF​51%
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