Index Stocks

Index funds have quickly become one of the most popular investments for a beginning investor in the 1990's. After all, why struggle to try and meet or beat the return of a stock index when you can actually own it?!

Index funds may never take the place of the traditional stock picking involved with a regular mutual fund but they have grabbed their foothold in the market by outperforming 9 out of every 10 mutual funds. And it's no doubt that investing in an index fund over a with a long time horizon in front of you can make you a very wealthy person.

Although these are wonderful investments, some investors are hesitant about investing in these for a couple reasons.

• These investments aren't really exciting. Because you don't actually pick the stocks in an index fund, you don't have the thrill of picking a winning stock. But no one should just invest in stocks for the thrill of it because then you find yourself buying riskier stocks and that might hurt you down the line.

• Index funds are mutual funds. Mutual funds are great for most investors but some people just outright dislike them. Sometimes it's because of their expenses (index funds have low expense ratios, though) and sometimes it's because they are a little difficult to sell shares in if you need the money right away. Investors prefer their online broker where they can type a couple keys, make a few clicks, and the order is filled.
• Index funds also usually carry minimum investments of $2500 and sometimes even more. You can usually get around this buy setting up an IRA or Roth IRA but if you don't do this, it can be hard to meet the minimum investments in some funds.

For those who want more control over their investments with low minimum investments, it would be great if an index stock came along so that the investor could have the ability to buy or sell more shares if needed while also achieving a return equivalent to that of the stock market. For some, this would be a great investment. But wait a second...index stocks are already available!

Index stocks are available to investors right as we speak. They are a lot like index funds only they are traded as stocks on the American Stock Exchange (AMEX). These stocks are also referred to tracking stocks because they track the market very closely and match its return.

These are excellent investments for people who already have a brokerage account and don't want to go through the trouble of setting up another account with a mutual fund company. If this sounds like your predicament, all you would have to do to achieve a return similar to that of the stock market is buy some shares of these stocks.

There are three different tracking stocks right now, all traded on the AMEX. They're traded under the names Diamonds Trust Series 1 (DIA), S&P Dep Receipts (SPY), and S&P Midcap Dep Receipts (MDY).

The difference between these stocks is that Diamonds Trust Series 1 tracks the Dow Jones Industrial Average (the Dow), S&P Dep Receipts track the S&P 500, and S&P Midcap Dep Receipts track the S&P 400. You still have to decide what index you would like to invest in but once you've done that, the stock will continue to track that index.

So if you've been waiting to invest in an index fund maybe these will encourage you to get off the sidelines and get in the game. If you continue to invest in these for the long-term, you can spend your time becoming a very wealthy and financially independent person rather than worrying about beating the stock market. This is because you will actually own shares in the stock market!

Akhil said:

Is there a similar index stock that tracks the TSX? I live in Canada.

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