Table of Contents
Introduction
Investments are a big business and there are many choices available. However, one investment strategy that is still relevant today is index funds. They are a simple and cheap way to diversify your investments and get exposure to a number of assets, including stocks and bonds with lower risk. Today, one of the leading companies in this area is State Street Global Advisors, one of the largest managers of assets in the world, which offers a number of funds for investors. In this article, the author will describe the advantages of index funds and how State Street Global Advisors has become a leader in this area.
What Are Index Funds?
First, it is important to define what index funds are before explaining why they are great. Index funds are a kind of mutual or exchange-traded fund (ETF) that seek to emulate a particular index, for instance the S&P 500. They are not picked by active management which means they do not choose specific stocks or bonds but rather hold all or a sample of the securities in the index they track.
The chief advantage of index funds is that they are relatively cheap. This is because passive management involves them tracking an index, which means incurring lower management and research costs than actively managed funds. This can greatly improve the long-term return, especially if compounded annually.
Why Diversity is Important
Investors are attracted to index funds because they offer instant diversification. Index funds include a number of securities within one fund, therefore they reduce risks and avoid large losses on a particular investment on a portfolio. This feature is particularly useful for the first time investor or for anyone who wants a set and forgets approach to investing.
State Street Global Advisors has a wide range of index funds across different asset classes such as equities, fixed income, international equities and real estate. For instance, their SPDR S&P 500 ETF (SPY) gives investors a chance to trade the 500 largest publicly companies in the U.S., offering exposure to different sectors and industries and avoiding the concentration risk of picking individual stocks.
Track Record of Performance
When investing, the past performance is often a key determinant of the investment to make. State Street Global Advisors has a strong track record with respect to the performance of its index funds. Some of its funds have often been ranked among the best in their respective categories and have provided attractive returns to investors.
A good example is the SPDR S&P 500 ETF (SPY) which has outperformed many actively managed funds aimed at beating the S&P 500 index. In the last ten years, SPY has provided an average annual return of 13%, which has been higher than many active funds that have higher fees.
Nevertheless, it is important to remember that past performance is not a guarantee of future performance. nulltheless, the success of State Street Global Advisors’ index funds stands proof of their ability to provide competitive returns.
Cost Efficiency
As explained earlier, one of the characteristics of index funds is their relatively low costs. State Street Global Advisors takes pride in offering affordable investment solutions. Their index funds have lower expense ratios than most other industry funds.
It is important to emphasize the importance of the fees as they can affect the final return over the years significantly. Let’s say there are two investors who each invests $100,000. Investor A selects an actively managed fund with an expense ratio of 1%; Investor B chooses an index fund with an expense ratio of 0.10%. Suppose both funds return an average annual rate of return of 7% over 30 years. Investor A would end up with approximately $574,000, while Investor B would have $761,000, or $187,000 more, which is attributed to the 0.90% expense ratio difference.
Investing for the Future: The Importance of a Long Term Strategy
Index funds are ideal for the slow and steady investor who wants to build wealth over time. Index funds work by providing a cross section of the market, thus allowing investors to participate in the market’s growth with reduced exposure to short-term volatility.
State Street Global Advisors has a good understanding of the need for long-term strategies and provides many index funds that are designed for various investor objectives and risk tolerance. Whether one is interested in a particular asset class or creating a product portfolio, State Street has the solutions for you.
