For almost half a century, individual and institutional investors have been pouring money into mutual funds that track an index, like the Russell 2000® or the S&P 500®. Today, other investment vehicles such as exchange-traded funds (ETFs) have made it even easier to participate in the market. In fact, some $5.1 trillion in assets are invested in index mutual funds and ETFs in the U.S. alone.1
For its part, Charles Schwab Investment Management (CSIM) oversees $315 billion in assets under management2 and is the nation's third-largest provider of index mutual funds and the fifth-largest provider of ETFs.3 We sat down with CSIM President and Chief Executive Officer Marie Chandoha to discuss the rise of index funds and what to know about these game-changing investment vehicles.
Why are index funds so popular?
Index funds offer a level of diversification that would be incredibly difficult for any single investor to achieve on her or his own. After all, some of these vehicles invest in hundreds or even thousands of securities. And they tend to be less expensive than actively managed funds because they don’t require a team of managers to make specific buy and sell decisions or actively monitor existing investments.
Are there areas of the market that index funds don’t cover?
Index funds are now so ubiquitous that investors can use them to access nearly any part of the financial markets—from large-cap U.S. companies to emerging-market bonds to Asian real estate. It’s really quite astounding how much of the investable world can be accessed through the use of index funds.
What should investors consider when researching index funds?
First, know which part of the market the fund tracks and how it fits into your overall asset-allocation strategy. In some cases, an index might appear to offer broad exposure when it’s actually dominated by just a handful of companies. Next, pay close attention to fees, which can vary widely, even among funds that track the same index. Operating expense ratios can really add up over time! Some fund companies even offer lower expenses to institutional investors, while individuals pay full freight. We don’t do that at CSIM. We believe that everyone deserves the same great pricing.
Do small differences in expenses really matter?
Absolutely! Every penny that goes toward expenses is a penny that can’t compound over time. And when you’re investing tens or hundreds of thousands of dollars, even seemingly trivial expenses can significantly diminish the eventual size of your portfolio.
Going forward, where do you see opportunities for innovation in index funds?
At CSIM, we’re not looking to innovate by creating more-complicated or niche products. Our focus is on creating foundational products, and our goal is to simplify investing and drive down costs. Most investors don’t need 50 different flavors of vanilla. What they need are high-quality products that provide great value, helping their portfolios to flourish over time.
Index mutual funds saw a record $197 billion in inflows in 2016.
Source: 2017 Investment Company Fact Book, Investment Company Institute.
12017 Investment Company Fact Book, Investment Company Institute. $2.6 trillion are invested in index mutual funds and $2.5 trillion are invested in ETFs.
2Charles Schwab Investment Management, as of 03/31/2017.
3Strategic Insight. Rankings based on assets under management as of 03/31/2017.
What you can do next
- See how Schwab’s market-cap index fund expenses compare to competitors.
- Want to talk about your portfolio? Call our investment professionals at 800-355-2162.