Is It a Good Idea to Take Out a Loan to Invest?

Is It a Good Idea to Take Out a Loan to Invest?

Investing is a great way to grow your money, but it can be difficult for many people to save up enough funds. If you are one of those people who want to invest in the stock market but don’t have the resources, taking out a loan might seem like a good idea. 

However, there are also some drawbacks that you should consider before borrowing money from a licensed money lender and other financial institutions. In this blog post, we will discuss when it is wise to take out a loan for investment purposes.

 

When is the Best Time to Take an Investment Loan?

It only makes sense to borrow a loan if the return on investment of the loan is high and the risk level of investment is low. It is not advisable to invest a loan in a risky type of investment, such as stock markets. 

Furthermore, it does not make sense to place the money in an investment that will mature after the loan is due. You must consider and make sure that the return on investment is greater than the cost of the loan.

 

Factors to Consider Prior To Borrowing a Loan

Here are some questions to ponder before deciding to take a loan. If your answer to all of these is “yes”, then you might be making the right decision.

•  Do I have the ability to pay back the loan easily? 

The best time to take a loan is when you have a good credit score. 

This is because if you have a good credit score of 700+, you’ll be paying lower interest rates. If you have a poor credit score of 550 and below, chances are, you’ll be paying higher interest. 

High interest means high monthly payments. And this could lead to paying more in interest than you earn from the return of investment (ROI).

•  Do I have a clear ROI on investing in the loan?

A good return on investment is generally considered to be about 7% per annum. If you can purchase an investment now at a low price that’s expected to increase in value, NOW is the best time to get started.  

•  Will I generate more income?

A good investment, of course, can add more streams of income for you. For example, you can invest in your business by purchasing new equipment to save you time and produce more yield. 

 

Closing

Borrowing and investing always come with a risk. While you cannot avoid them, taking into consideration your current financial circumstance will help you minimize investment risks.

If you believe now is the right time to take a loan, it’s critical to shop around to get the best deals. Analyze personal loans on a loan comparison site like Loan Advisor to help increase your chances of getting the best offers from the top licensed money lenders.

How to Use Schwab Bond Index Funds to Build Your Conservative Portfolio

Schwab Bond Index Funds to Build Your Conservative Portfolio

It is all about your hard-earned sweat! Am I right? You count on them for all your personal goals, retirement, or second career! Now you should treat it seriously more than ever. Yes! I am talking about building up your investment portfolio.

If you are now planning conservative portfolios, bond index funds are necessary choices on the way forward. It provides stable income streams and serves as the hedge against fluctuations of other investments like stocks and options.

 

What is a Bond Index Fund?

A bond index fund is investing by mimicking most of the components from a bond index like Bloomberg Barclays US Aggregate Bond Index. It is a passive-managed investment model. In other words, if you invest in a bond index, you invest in thousands of government and corporate bonds at the same time.

Apart from the vast exposure to the bond market, it has the following benefits:

1. Diversification

As mentioned earlier, broad exposure reduces the risks of just holding a few bonds in your portfolio when one or two companies fail. You may not be worried you will lose some of your nest-eggs and, meanwhile, grow your assets. 

2. Research

Investing involves time on research, collection, and analysis of data before you make the final decision. Index fund covers almost the whole market or sector, so you can save it and focus on other objectives in your life.

3. Performance

There are two types of investing styles: active-managed and passive-managed ones. According to research, the managers of active-managed funds actively seek to win the bets, but few beat the market index. Passive-managed funds invest by modeling against the market index and represent the market.

4. Tax efficiency

As bond index funds track a market index’s components, securities turnover is less than an actively-managed fund. Therefore, index funds rarely pay more tax than active ones—the probability of a higher return increases due to tax savings.

5. Lower fees

Index funds have lower expenses like research, active trading costs, administration loads than active ones. As a result, lower costs transform into savings and increase the return. 

 

Index Mutual Funds vs. ETFs

You should know the differences between the two types of funds before making the right choice. 

  • Index mutual funds: There is only one price quote(net asset value per unit) from a mutual fund company after markets close. The buyer must be a mutual fund company.
  • Index ETFs: Like stock, they are traded on the stock exchanges through brokerages. The prices are continuous and various during trading hours. The market price of an ETF is different but close to NAV(net asset value). Buyers for an ETF can be an individual or an institution.

Read more: Index Fund vs. ETF: What’s the Difference?

 

About Schwab Bond Index Funds

Charles Schwab offers a series of quality mutual funds and ETFs to investors. The products are suitable for investors in planning for their retirement or steady income streams. Investors avoiding exposure to fluctuating assets like stocks are likely to put them into their portfolios. However, you should talk to financial advisors before investing. The following table consists of the fund information:

Fund Product Type Net Expense Ratio Investing Objectives
Schwab California Tax-Free Bond Fund(SWCAX) Mutual Funds 0.49% The fund seeks high current income exempt from federal and California personal income tax consistent with capital preservation.
Schwab High Yield Municipal Bond Fund(SWHYX) Mutual Funds 0.60% The fund seeks to generate interest income that is not subject to federal income tax.
Schwab Short-Term Bond Index Fund(SWSBX) Mutual Funds 0.06% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index composed of U.S. investment-grade government-related and corporate bonds with maturities between 1-5 years.
Schwab Tax-Free Bond Fund(SWNTX) Mutual Funds 0.49% The fund seeks high current income that is exempt from federal income tax, consistent with capital preservation.
Schwab Treasury Inflation-Protected Securities Index Fund(SWRSX) Mutual Funds 0.05% Objective: The fund’s goal is to track as closely as possible, before fees and expenses, the price and yield performance of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L)SM.
Schwab US Aggregate Bond Index Fund(SWAGX) Mutual Funds 0.04% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index composed of the total U.S. investment-grade bond market.
Schwab 1-5 Corporate Bond(SCHJ) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the short-term U.S. corporate bond market.
Schwab 5-10 Corporate Bond(SCHI) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the performance of the intermediate-term U.S. corporate bond market.
Schwab Intermediate-Term US Treasury ETF(SCHR) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury 3-10 Year Index.
Schwab Long-Term US Treasury ETF(SCHQ) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of an index that measures the long-term U.S. Treasury bond market’s performance.
Schwab Short-Term US Treasury ETF(SCHO) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury 1-3 Year Index.
Schwab US Aggregate Bond ETF(SCHZ) ETFs 0.04% The fund’s goal is to track as closely as possible, before fees and expenses, the Bloomberg Barclays US Aggregate Bond Index’s total return.
Schwab US Tips ETF(SCHP) ETFs 0.05% The fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Bloomberg Barclays US Treasury Inflation-Linked Bond Index (Series-L).

 

Schwab Bond Index Funds

Charles Schwab offers two index funds based on the same index: Bloomberg Barclays US Aggregate Bond Index. One is a mutual fund(SWAGX), the other is an ETF(SCHZ). They are the fund products very suitable for inclusion into a conservative portfolio because both invest in the US Government and corporate investment-grade bonds.

Let us see their similarities and differences:

Types as of January 31, 2021 Schwab US Aggregate Index Bond Fund(SWAGX) Schwab US Aggregate Bond ETF(SCHZ)
Performance over one year -0.75% -0.68%
Past three month return 0.37% 0.61%
Distribution yield 2.31% 2.44%
Expense ratio 0.04% 0.04%
Assets under Management as of February 25, 2021 US 5 Billion US 8.6 Billion
Inception date February 27, 2017 July 14, 2011

 

How to Build your Conservative Portfolio using Schwab Bond Index Funds

You want to preserve your portfolio’s value because you will need it very soon or cannot afford to lose as the market goes down. No matter the reasons, you may still earn some small but better than banking’s return on your investments.

Conservative investors can use the two funds (SWAGX, SCHZ) to build up their portfolios and achieve their aims. How is that? The two funds the following advantages for conservative strategies:

  • Risk: You can see, from the table above, the price swings are small(within one percent), whether it is three-month or one year. It is fit for cautious investors unwilling to see huge asset ups and downs.
  • Performance: The two index bond funds provide a very stable income stream of two percent plus each year. It is a good deal if you want to preserve capital and earn a reasonable income.
  • Low fees: The cost is less than most bond index funds. The expense ratios are as low as 0.04%!

In a word, I would suggest any one of these two funds should make up at least eighty percent of your portfolio, whether they consist of your banking assets or brokerage accounts at the end of the day. You can hit two birds with a stone!

 

Things to Consider Before Investing in Schwab Bond Index Funds

Like what I say above, a clear picture of what Schwab bond index funds can create as an essential component of your portfolio is vital to reaching your goals. Regarding your low tolerance of risk, fund performance like minimum asset price fluctuations, and lower fees, the two Schwab bond index funds are appropriate to your choice in structuring your conservative portfolio.

 

Final Words

Besides the three factors, rebalancing your portfolio is also vital to your success. Though eighty percent is a rule of thumb in adjusting your investing strategies, you should review your portfolio regularly to ensure you are on your way to your financial goals.

Besides discussing your financial advisor’s financial goals, you should look for more information and professional analysis to understand your investments and financial markets. 

Investoralist is an excellent place for you to have in-depth knowledge about mutual funds, ETFs, stocks, and bonds. Subscribe to our newsletter to stay on top of your investment strategy this 2021!

Fidelity vs. Vanguard: Which is Best for You?

Fidelity vs. Vanguard Which is Best for You

Fidelity has over 32 million clients and 8.3 trillion dollars of assets under management as of June 2020; Vanguard has over 30 million customers and manages over 6.2 trillion dollars of assets globally as of June 2020.

They both offer stock, bond trading service, mutual funds, and ETFs services. They are also the primary retirement and savings plan sponsors in the US. 

Fidelity offers more sophisticated services for advanced investors, while clients like Vanguard’s simple trading system interface for making easy buy-and-hold investing.

Here are the similarities and differences of the two investing institutions and show both brokers’ advantages and drawbacks.

 

Fidelity vs. Vanguard: an Overview


1. Fidelity

Fidelity is a name for outstanding and well-known aspects in investing business.

  • Its research offers more than 20 third-party analyses to clients. The notable companies include Thomson Reuters, Standard & Poor’s, Recognia and Ned Davis, and McLean Capital Management. Fidelity provides a page “ Equity Summary Score,” which evaluates independent research firms’ accuracy for clients’ reference. More than that, if clients are overwhelmed by the number of research outputs, they can take a small test to see which analysis fits their preferences and styles.
  • Fidelity provides multiple screeners for various investment tools like stocks, bonds, ETFs, mutual funds, and options for investors to choose from easily and conveniently.
  • Technology is Fidelity’s edge here. The “FullView” system lets you pull your assets outside Fidelity into the interface for analysis and limited financial consultation. Clients can get advice like asset allocation and risk tolerance through the system. It also shows information like account balance, buyer power, and internal rate of return.

2. Vanguard

  • Vanguard is named most for the number of its index mutual funds and ETFs. The expense ratio is low for most of its funds. Suppose you are a buy-and-hold investor and need occasional adjustments to your portfolio. Vanguard is your ideal candidate.
  • Vanguard’s corporate structure is quite different from others. What makes it so unique is the company is owned by its funds and subsequently the funds held by investors. Therefore, the investors are the real owner. The advantages are costs are lower than general corporations, and the savings ultimately return to investors.

 

Fees and Commissions

I must state both are excellent investing brokerages and retirement plan participating sponsors. The table below compares details of their services:

Items Fidelity Vanguard
Account Minimum $0
  • $0 
  • a minimum of $1000 for funds
Account fees (Inactivity, Annual, Transfer) $0
  • $0
  • $20 annual fee for accounts without sign-up for e-statements
Research Free and comprehensive
  • Free
  • average quality
Equity trading cost $0 $0
Options trade
  • $0
  • $0.65 per contract
  • $0+$1 per contract
  • account balance with $1 million or more gets 25 trades free each year
  • account balance with $5 million or more gets 100 trades free each year
No of mutual funds without transaction-fee More than 3,400
  • More than 3,100 from outside providers
  • 120 or more from Vanguard
No of ETFs without commissions All All
Types of securities for trade
  • ETFs, Mutual Funds, Options, Stocks, Bonds, Fractional Shares.
  • ETFs, Mutual Funds, Options, Stocks, Bonds, CDs
Mobile App Advanced features
  • Trades for Stocks, Mutual Funds, ETFs.
  • Manage account activities and performance
  • Follow market news and analysis.
Trading Platform
  • Fidelity.com
  • Active Trading Pro – Free
Basic
Customer Service Call, email, and live chat 24/7 a day Call support from Monday- Friday 8 am to 9 pm and e-mail support.

 

Investment Selection


Fidelity

  1. Fidelity is one of the low-cost commission advocates. It cancels all commissions for stocks, ETFs, options, and account fees. It also adds zero expense mutual funds, e.g., the Fidelity Zero Extended Market Index Fund, the Fidelity Zero International Index Fund, the Fidelity Zero Total Market Index Fund, and the Fidelity Zero Large Cap Index Fund.
  2. You can use those funds above to build up a portfolio expense-free! Fidelity has over 3400 no-transaction-fee mutual funds and over 700 mutual funds and ETFs with as low as a 0.05% expense ratio. The funds come from Fidelity and outside companies. Besides, it has no minimum requirement for fund investments.
  3. Fidelity provides a stock-shorting service of more than 3000. Investors can buy penny stock on OTCBB. The products also cover bonds, single-leg, multi-leg options, forex, international investments, and fractional shares.

Vanguard

  1. Vanguard is a pioneer of low-cost funds. John Bogle, the founder of the company, created the concept of an index fund. Today most financial institutions embrace Vanguard’s index mutual funds and exchange-traded funds(ETF) into their portfolios.
  2. Vanguard also founds two socially conscious mutual funds and three ETFs to cater to investors’ needs. According to Morningstar, Vanguard’s funds and ETFs have the lowest expense ratios in the industry. The average expense ratio for Vanguard is 0.10%, while the industry average is 0.45%. The 0.35% difference makes a massive impact on your savings when it accumulates year over year!
  3. You may not have noticed the company offers 3100 funds to customers. Of them, 120 or more are from Vanguard. The unique point is they have no transaction fees. Vanguard does not actively use incentives to promote business; they think the cost saved should be used to reduce expenses of running funds. That ultimately benefits fund investors by enhancing returns.
  4. Admiral shares: You will be surprised Vanguard has another lower class of fund shares to investors than its already expense-low funds. The admiral class is 41% cheaper than other standard classes in cost. But you have to subscribe to a threshold for a fund to enjoy the benefit. The threshold varies subject to the fund itself.
  5. Vanguard will automatically transfer your idle cash into Vanguard Federal Money Market Fund – a high yield but low expense ratio fund.
  6. If you don’t know how to choose a fund for your goals, Vanguard offers one “all-in-one-fund” service. It will guide you on how to select a balanced fund based on your objective, time horizon. The beautiful thing is once you invest in the fund, it will automatically rebalance the asset mix appropriate to your age and time to goals. The index funds are well-diversified, professionally managed by experts, and also low-cost. 
  7. The “all-in-one” funds offered include Vanguard Target Retirement Fund, Vanguard LifeStrategy® Fund, The Vanguard College Savings Plan. You should consult your financial consultant before making any decision.

 

Online Advisors and Educational Offerings


Fidelity

• Online Advisor

Fidelity Go, like a Robo-advising service, is an online advising service offered by Fidelity investment professionals. Once you input your financial goals, age, risk profile, and contribution amounts, Fidelity will perform analysis and recommend investment portfolios suitable for your risk tolerance level. 

More than that, they will manage your portfolio on a day-by-day basis. Your activities with Fidelity all take place online, like communications, performance reports, and consulting services. Low-cost investments like funds will be the primary tools to maximize profits.

The fee for Fidelity Go is progressive based on the account balances:

$0-$9,999 $10,000-$49,999 $50,000 or above
$0 $3/per month 0.35% per year


Educational Offerings

Fidelity’s online learning center posts more than 600 articles about investments such as options, bonds, and stocks and shows how to use fundamental or technical analysis in investing. It also explores life topics like retirement, education, and target planning in savings.

Besides in-house staff, they also invite field experts to produce much information using articles, infographics, videos, live and recorded webinars to promote wealth accumulations.They hold weekly online coaching sessions to explore investment topics like options and technical analysis.

Regarding the mobile app, Fidelity uses the “Learning Program” to educate people about investing. The company also launches the Fidelity Spire to help young adults on planning for their financial goals. The app allows users to link up two goals to their respective accounts. 

One is a short-term goal linked to the Fidelity Cash Management Account. Fidelity will not charge this type of account and even reimburse the ATM fee. Another is a long-term goal linked to the “Fidelity Go” and aims for long-term asset growth. They shall open a brokerage account with Fidelity if they accept recommendations from the “Fidelity Go.”

Moreover, the “Moments Page” is created to tell life planning stages like childbirth, education, marriage, and retirement and coach savers towards life goals using Fidelity’s tools.

Vanguard

Online Advisor

Vanguard also offers a digital advisor service. Like other investment management functions, Vanguard Digital Advisor can handle personal accounts like IRAs, Roth IRAs, rollover IRAs. You can use the system to connect non-Vanguard plans for accurate projections of financial situations. 

The fee is 0.15% for assets managed. The account minimum is $3,000, and the low-cost ETFs are the primary products for investments in clients’ accounts.

Educational Offerings

Vanguard wrote about 250 articles on its website in 2019. The focus is on helping investors on the way to achieving their financial goals. The offerings are primary in blogs, podcasts, research papers discussing economics, retirement planning, and Vanguard’s products. Others as live webinars/events and youtube are rare.

 

Online and Mobile Experiences


Fidelity

  • Fidelity offers two kinds of online trading platforms. Investors can use the official web-based platform or downloadable software to trade stocks and options. The interface is easy to use and navigate. 

For buy-and-hold investors, the web-based platform covers more than enough for transactions. A well-designed interface provides corporate news, quotes, charts, watchlist on a screen in an organized way but does not overwhelm beginners.

Furthermore, The “Position” page in the system also allows investors to read the latest research while lets investors stay on a screen of their portfolio.

More than that, investors can perform “buy and sell” functions simultaneously without being forced to leave the same page. New investors can even have a help menu inside to walk through the system on an all-in-one screen.

  • “Active Trader Pro” is downloadable software for active and experienced investors to engage in trading activities. Apart from the web-based platform’s essential functions, it is a customizable program for creating a tailor-made workspace as per an individual’s needs. 

It monitors and alerts on relevant news and technical signals such as highs and lows and a ticker’s latest stock market position.

Moreover, traders will find it convenient to look for a target company’s financial information like market size, PE ratio, dividend yield, and ratings on the news and research tab.

You have more choices to set your defaults like market or limit orders, time, size, types, and even place a trade in a chart on the program. It also provides a probability calculator, options analytics, and related technical measures to execute the trades. The “ Active Trader Pro” has more to offer than an active actor needs in investing.

  • Mobile experience: The mobile app handles most types of investment vehicles except fixed-income products. Though the trade functions are more limited than the desktop and the “Active Trader Pro,” it is still more superior to other apps of the same nature.

Vanguard

As to the online and mobile trade experience, Vanguard’s technology is outdated, data and trades are delayed. The user interface cannot show updated information. It also lacks functions to carry sophisticated transactions and multi-tasks. However, less active traders are still comfortable using it. Vanguard also offers “Vanguard Personal Advisors” –a hybrid robot-advisor service. It provides personal financial planning and asset allocation services but charges 0.13% with a minimum account balance of $50,000.   

 

Fidelity vs. Vanguard: Which One is Right for You?

  • Fidelity offers advanced technology, whether it is an online platform or sophisticated software, to make investors trade more conveniently and quickly. Besides writing blogs, the company holds frequent and regular webinars and podcasts, and live events to help investors, particularly young adults, in financial planning. A lot of research information is available for new and experienced investors to understand various investment markets.
  • Vanguard emphasizes its products of low-cost mutual funds and exchange-traded funds(ETF). The expense ratios for most of the products are lower than most companies.
  • Fidelity is ideal for active investors requiring premium research and advanced technology and mutual funds and ETFs of various investment options. Vanguard is fit for long-term and buy-and-hold investors, who are busy or may not focus on their portfolios for a long time, looking for low-cost mutual funds and ETFs as well.

 

Investing Tips

If you are an active investor who likes using sophisticated technology and trading skills, you will also likely comb through resources before making a judgment. Fidelity is fit for you because it offers advanced technology like web-based, mobile, and software platforms to cater to an investor’s needs. It also provides plenty of research and education resources to aid investors.

If you are an investor of a long-term vision and do not bother with the short-term ups and downs of markets, besides, you are busy with other things in life other than your investments; Vanguard is ideal for you. It offers a wide array of mutual funds and ETFs covering major global markets and industrial sectors with average expense ratios of as low as 0.06%. I suggest you should consult your financial advisor before deciding which is best for your objectives.

Subscribe to our newsletter to stay on top of the ever-changing investment landscape!

Roth IRA Charles Schwab Review

Roth IRA Charles Schwab Review

Roth IRAs offer many benefits though the contributions are not tax-deductible. Taxpayers enjoy the benefits of withdrawing their money free of tax after reaching the statute age of 591/2. It appeals to many people, but only if they must be smart in choosing the right kind of Roth IRAs. 

Choosing a reliable Roth IRA is not easy. Charles Schwab IRA provides more than benefits but strong support for IRA savers on the way to achieving their aims.

 

What Is a Roth IRA?

An alternative to a traditional individual retirement account, a Roth IRA also offers tax benefits to wage earners to save for retirement. The retirement plan requires mid-to-long term savings to obtain investment benefits and tax benefits. A Roth IRA has the particular characteristics investors should take note of:

  • After-tax contributions: Unlike traditional IRAs, a Roth IRA is an after-tax contribution account. However, the contributions and earnings are tax-free only after savers reach a certain age and hold for at least 5 years.
  • Multiple account types for Roth IRAs: Different types of financial institutions offer Roth IRAs. They are banks offering CDs; brokers and robot-advisors offer stocks, bonds, mutual funds.
  • As different institutions provide various investment products, investors should beware of their risks. For example, Federal Deposit Insurance Corporation(FDIC) has insured CDs, but the yields are low and may not catch up with your cost of living when you retire.
  • Stocks may protect this kind of risk and be better tools for asset growth, but price may always go ups and downs. Bonds are asset protectors; nevertheless, the yields are still low. You should talk to your investment advisor and retirement professional for any further actions.

 

Pros of Charles Schwab Roth IRAs

1. Fees & Account Minimum Requirements

You will be happy with its zero-commission of online stock trade offer. Besides, more than 4000 mutual funds and ETFs from Charles Schwab are also free of commissions and transaction expenses. Even if you like to trade options, the cost is just 0.65 dollars per contract. 

What’s more, you need not pay anything as a deposit when you open an account or if you even trade less within your Roth IRA. There is no annual fee at all.

There are no account minimum requirements for opening a Roth IRA. You have 2 ways to open an IRA account: you can open an account with the Charles Schwab website or visit any local Charles Schwab branch. All you need to get prepared are your social security numbers, beneficiary information.

• Wide ranges of investment choices

As you can see, Charles Schwab offers a long string of choices like stock and bond trading services. You can choose more than 7000 mutual funds and ETFs available from Charles Schwab. Among those, ETFs and bond index funds are extremely low in expense. Therefore, you can put more into saving and earn more. 

You should note that you can invest in 4000 more out of 7200 funds without paying commission and transaction fees. Whether the choice of offers is enough depends on personal preferences and objectives, but they are fit for most investors.

Furthermore, Charles Schwab helps savers screen funds by creating a mutual fund and ETF Select list. Investors can find their favorite funds based on criteria such as investment tools like stocks, bonds, or Morningstar category, expense ratio, and benchmark index. It is user-friendly too for beginners and advanced investors as well.

Charles Schwab also has a “Personalized Portfolio Builder” that helps you create a tailor-made portfolio based on your risk tolerance, financial goals, and time to retirement. You are sure not to stay away because of the diversity of investment products.

Fractional shares are now available to IRA investors. You can buy a portion of a share for a proportion of a full price. It is called “Stock Slices.” You can buy 10 slices at a time, but the “slices” are now limited to components of S&P 500 companies only. 

2. Strong Research Support

Customers can come across in-depth research and analysis through Charles Schwab’s website. 

• Equity research

Stock investors get earnings news and analysis from Reuters, Credit Suisse, MarketEdge, and Ned Davis and among 14 others.

Mutual funds & ETFs

Charles Schwab also provides Morningstar’s fund’s ratings and commentary services.

Bonds

Investors can screen and select their picks through the Schwab BondSource system. The bond analysis is available from Standard & Poor’s and Moody’s.

In-house Research

Besides, Charles Schwab has in-house research experts offering investments and rating services to clients.

3. Technology

Charles Schwab has put many efforts into developing user-friendly investment tools to help clients manage their Roth IRAs. 

StreetSmart Edge

It is the flagship and robust trading platform for IRA clients and others. You can download it from the website, or you can use the cloud-based online version. What is impressive is you can make not just simple trades; you can use the navigation bar to create a personal and customizable monitor to do sophisticated tasks like multiple trading with different types of market orders at one time. 

The system also allows you to monitor your market exposure continuously. You will be impressed with the unique feature, the “ Balance Bar,” which lets you see your portfolios and buying power and build up and edit multiple market layouts. Also, you can watch the news feeds and live CNBC coverage within StreetSmart Edge.

Moreover, it has trading programs called “Streetsmart Central” tailored for options investors.

Schwab.com

It lets you trade on its official website. Through it, you can trade stocks, bonds, ETFs, and options with market orders. Besides, you can access multiple news sources and market information instantly.

Virtual Assistant

You will access market quotes and information like stocks and bonds. Even you can organize a watchlist by it. All you have to is to download the “Schwab Skill” in Amazon’s Alexa.

Mobile App

Like Charles’s other technologies, through Schwab mobile and StreetSmart mobile apps, you can monitor your portfolios and watch market news. You can trade and deposit checks, set alerts with voice commands via a virtual assistant. You can also integrate the app’s information and communication with the apple watch.

Technology support is Charles Schwab’s selling point in helping clients better manage their IRAs. 

4. Customer Support

You may not expect or believe Charles Schwab works 24/7 a day, seven days a week! Just dial a number, and you are connected, even at midnight. Of course, you may send emails to them and get a reply as soon as they can. If you prefer online chat, they will send you the greetings around the clock!

You can reach them at the 300 branches across the country as early as 8 pm. They will be expecting you until 5 pm. Some branches are open to business on Saturdays. So check before paying a visit to one of them.

 

Cons of Charles Schwab Roth IRAs

You should note the following things before opening a Roth IRA with Charles Schwab:

1. Low cash sweet rate

Idle cash parks in a brokerage account and earns only 0.01%. You can transfer it to Schwab Value Advantage Money Fund(SWXXX). It has no minimum requirements and earns a higher rate of interest. You must do it yourself.

2. Fractional Shares restriction

Currently, investors only buy fractional shares relating to S&P 500 companies. Other brokers like Fidelity Investments or Interactive Brokers have no such limitations.

3. Transfer out Fees

You have to pay $50 for full transfer and $25 for partial transfer out of assets from Charles Schwab.

4. Forex and Cryptocurrency

You may be a little disappointed because Charles Schwab doesn’t offer these services now, but rest assured, they are doing integration work with TD Ameritrade since its acquisition in 2020. TD Ameritrade is offering the services, so hopefully, Roth IRA investors can access the services later this or next year.

 

Is Charles Schwab Roth good for Roth IRAs?

You will find they’ve developed the most robust technology to back up full service for stock trading like SmartStreet Edge, BondSource for bond trading, and SmartStreet Central for Options trading as well. Apart from technology, Charles Schwab provides 24 hours day services, so not a single day is missed for clients.

 

Is Charles Schwab Suitable for Beginners?

Besides the user-friendly interface system, no minimum requirements and low expense funds will benefit investing beginners. All-round customer support provides a cushion to investing beginners in managing their IRAs. User-friendly trading systems and full coverage of investment analysis are for beginner investors easy in investing.

 

Is Charles Schwab Roth IRA Right for You?

More than just for beginners, the systems offer multi-functions for sophisticated investors to pinpoint market opportunities. Whether web-based, downloaded software and mobile app, combined with professional research and analysis from outside or in-house experts, they are a strong back-up for experienced and active traders and investors.

Closing

You need more information to make a wise investment decision; Investoralist offers investing and retirement commentary and analysis and helps you on your way to your financial goals. Click on the Subscribe to our newsletter for more benefits!

Top 18 Vanguard Bond ETFs to Buy

Top 18 Vanguard Bond ETFs to Buy

A bond ETF, similar to stock ETFs, is a pooled investment fund primarily investing in bonds. They invest based on bond market indexes like Bloomberg Barclays Global Aggregate Bond Index, Citi World Broad Investment-Grade Bond Index, and Citi World Government Bond Index. Like a mutual fund, bond exchange-traded funds(ETFs) are tradable on major stock exchanges in the US.

Bond ETFs are liquid and transparent investment securities as they are public-listed. Due to disclosure requirements, unlike real estate, bond ETFs reflect their values quickly and timely according to changes in the economy and the company’s credit situations.

Bond ETFs invest mainly in Government Treasuries and corporate fixed-income securities. Investors can gain access to different types of bonds with different yields and maturities. More than that, as bond ETFs are passively-invested funds, the cost is lower than other bond mutual funds.

 

Understanding Bond ETFs

Bond ETFs offer many benefits individual bonds don’t. Let’s take a look at them in detail:

Coupon/Interest payments

Most bonds pay interest or coupons regularly, mostly on a six-month schedule. However, bond ETFs, due to structure design, can pay coupons monthly. An example is: Vanguard Total Bond Market ETF(BND) has 10,025 bonds in its portfolio. The fund has a wide range of respective coupon payment dates. Therefore it can pay interest more frequently to bond investors than general bonds.

Liquidity

Liquidity is one of the problems a bond investor faces in their investment portfolios. As a denomination of $1,000 for a bond is a minimum requirement for investing in bonds, bondholders may find it difficult to sell out in a short time. Besides, the pricing information is not always accurate due to low market liquidity.

Like stocks, bond ETFs trade all day, and updated price quotes are always available in exchanges. Investors can track the updated pricing information whether they intend to sell or buy.

 

Pros and Cons

You may want to hold bonds in your investment portfolio; however, you should know some benefits and drawbacks of investing in Bond ETFs before making any decisions.

1. Diversification(Pros)

Investors in a bond ETF hold a stake in a fund owning thousands of bonds in markets. For example, suppose you buy a unit of the Vanguard Total International Bond ETF(BNDX). In that case, you have already held a part of 6,323 bonds across North America, Europe, Japan held in the portfolio. Diversification reduces the risk enormously because you hold many bonds simultaneously.

2. Buy bond ETFs online(Pros)

It is never much more convenient than ever to buy bonds ETFs online. Open an account on brokerages’ official websites like TD Ameritrade, Fidelity, Interactive Brokers, and trade to easily buy or sell funds. But beware that there is a commission charged to you through some of the brokers. You should check before doing it.

3. Maturity(Cons)

No maturity dates are available for bonds within ETFs. As an ETF fund holds bonds with multiple maturities, it is not practical to redeem the bonds simultaneously for principals in a short time. They can, however, sell units of the bond ETF they invested in earlier. 

4. Interest Rate Risk(Cons)

As mentioned earlier, bond ETF investors do not own the bonds themselves. They buy units of a bond ETF. When the interest rate rises, the bond prices fall. Investors cannot do anything to stop the fall of the bond value except for selling their stakes.

 

Bond ETFs vs. Bond Mutual Funds

You should beware of the advantages and disadvantages of both types of funds.

  • Investment objectives: If you want to increase bond fund investing returns, bond mutual funds may be the right choice. They belong to active-managed funds seeking higher returns. But you should note the risks are higher than bond ETFs. 

Though being passive-managed funds, bond ETFs are suitable for do-it-yourselves investors. ETF investors can make frequent trading within business hours as ETFs can be traded in full business hours while bond mutual funds have one price quote only in a day.

  • Bond buy-back: As there are no maturities for bond ETFs, bond ETFs may find it hard to redeem the bonds and get back full principals for investors. However, bond mutual funds may repurchase them from investors.

 

Bond ETFs vs. Bond Ladder

Bond Ladder is buying bonds with different maturities and reinvesting with the proceeds upon maturities. The purpose is to 1. increase income, 2. reduce interest rate risk, credit risk, and liquidity risk.

  • Regarding income, bond ETFs have the flexibility of paying monthly and do not require the effort of re-designing bond laddering strategies over and over again.
  • In terms of interest rate risk, a bond ladder may have more reinvesting protection than a bond ETF. 

However, a bond ladder may face credit risk when investors choose smaller companies with smaller bonds using a bond ladder. Bond ETFs buy bonds from larger companies and Governments within the indexes and reduce the credit risks.

Furthermore, a bond ladder should match the bond maturities in the portfolio so they can provide liquidity. The price quotes of bond ETFs are on-screen on the exchanges and tradable all day. They both have the risk of getting full principals back upon maturity.

 

Things to Consider Before Getting a Bond ETF

Before investing in a bond ETF, you should consider several things:

Think long term

You should know a bond ETF is a mid-to-long-term investment with stable income streams. Income takes priority over capital appreciation. If you think otherwise, you may suffer from the loss.

What is the best Vanguard bond ETF?

Vanguard is one of the prestigious bond investing companies. The Vanguard Total Bond Market ETF(BND) invests in the US Federal Government bonds (more than 60%) and investment-grade corporate bonds (the remaining). It almost eliminates the credit risk!

Furthermore, it holds more than 10,000 bonds and diversifies significant risks.

What are the best bond ETFs?

Apart from two Vanguard bond ETFs, some best-run funds are low-cost and offer stable income. They are suitable for being a part of your portfolio:

  1. iShare Core US Aggregate Bond ETF(AGG)
  2. iShares Core Total USD Bond Market ETF(IUSB)
  3. iShares U.S. Treasury Bond ETF(GOVT)
  4. SPDR Bloomberg Barclays 1-3 Month T-Bill ETF(BIL)
  5. PIMCO Enhanced Short Maturity Active ETF(MINT)
  6. DoubleLine Total Return Bond Fund Class N(DLTNX)
  7. BlackRock Strategic Income Opportunities Investor A(BASIX)
  8. Vanguard Core Bond Fund Investor(VCORX)
  9. Vanguard Long-Term Bond ETF(BLV)
  10. Vanguard Intermediate-Term Bond ETF(BIV)
  11. Vanguard Short-Term Corporate Bond Index Fund ETF(VCSH)
  12. Vanguard Total Bond Market ETF(BND)

These are some of the best bond ETFs available for investors to consider. You should consult a financial professional before making any decision.

Does Vanguard have a high yield bond ETF?

No, Vanguard does not offer high yield bond ETFs but has a high yield bond mutual fund. The company thinks such a type of bond ETFs is not fit for conservative investors.

Are bond ETFs a good investment?

Beforehand, you should consider your investment strategy: If you intend to invest in bond funds, you should look at two options: bond ETFs and bond mutual funds. You may like bond ETFs if you are a frequent trader, as bond ETFs are tradable all-time on the exchanges. You should invest in bond mutual funds if you are worried about finding buyers for ETFs as the mutual fund can repurchase your stakes back.

 

List of all Vanguard Bond ETFs

Here is a list of main Vanguard bond ETFs currently offered:

Name Ticker Asset Class Expense Ratio Investment Objectives
Extended Duration Treasury ETF EDV Bond – Long-term Treasury 0.07% Broad exposure to long-term Treasury STRIPS market; Provide steady income with high credit quality.
Intermediate-Term Bond ETF BIV Bond – Inter-term Treasury 0.05% Exposure to 5-10 year bonds with US Government and Corporate bonds of investment-grade, also to international dollar-denominated bonds.
Intermediate-Term Treasury ETF VGIT Bond – Inter-term Government 0.05% Invest primarily in the US Treasury bonds.
Long-Term Bond ETF BLV Bond – Long-term Investment 0.05% Diversified exposure to the long-term, investment-grade U.S. bond market.
Long-Term Treasury ETF VGLT Bond – Long-term Government 0.05% Invests primarily in U.S. Treasury bonds and Maintains a dollar-weighted average maturity of 10 to 25 years.
Mortgage-backed Securities ETF VMBS Bond – Inter-term Government 0.05% Invest primarily in U.S. agency mortgage-backed pass-through securities issued by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC).
Vanguard Short-Term ETF BSV Bond – Short-term Investment 0.05% Invests in U.S. government, high-quality (investment-grade) corporate, and investment-grade international dollar-denominated bonds.

 

Short-Term Inflation-Protected Securities ETF VTIP Bond – Short-term Government 0.05% Invests in bonds backed by the full faith and credit of the federal government and whose principal is adjusted semi-annually based on inflation.

Designed to generate returns more closely correlated with realized inflation over the near term

Short-Term Treasury ETF VGSH Bond – Short-term Government 0.05% Invest primarily in high-quality (investment-grade) U.S. Treasury bonds.
Total Bond Market ETF BND Bond – Inter-term Investment 0.035% Provide broad exposure to the taxable investment-grade U.S. dollar-denominated bond market, excluding inflation-protected and tax-exempt bonds.
ESG US Corporate Bond ETF VCEB Bond – Inter-term Investment 0.12% Screened for certain environmental, social, and corporate governance (ESG) criteria.
Intermediate-Term Corporate Bond ETF VCIT Bond – Inter-term Investment 0.05% Invests primarily in high-quality (investment-grade) corporate bonds
Long-Tem Corporate Bond ETF VCLT Bond – Long-term Investment 0.05% Invests primarily in high-quality (investment-grade) corporate bonds
Short-Term Corporate Bond ETF VCSH Bond – Short-term Investment 0.05% Invests primarily in high-quality (investment-grade) corporate bonds
Total Corporate Bond VTC Bond – Inter-term Investment 0.05% Unique ETF of ETF structure
Tax-Exempt Bond ETF  VTEB Bond – Inter-term National Muni 0.06% provide federal tax-exempt income and can tolerate moderate price and income fluctuations may wish to consider this fund
Total World Bond BNDW International 0.06% Broad, diversified exposure to the global investment-grade bond market
Total International Bond ETF BNDX International 0.08% 1. Employs hedging strategies to protect against uncertainty in exchange rates

2. Provides a convenient way to get broad exposure to non-US dollar-denominated investment-grade bonds

Vanguard Emerging Market Government Bond (higher risk) VWOB International

0.25 (high)

Provides a convenient way to get additional exposure to emerging market government bonds

 

Final Words

The top 18 Vanguard bond ETF fund series offers a wide choice for investors to choose. As you can see, they are low-cost and passively managed funds. They are suitable for conservative investors who want to preserve capital and need steady income regularly or monthly. 

For aggressive investors, they can be a hedge against downfalls of other investments due to market crashes or recession.

Like other ETFs, Vanguard bond ETFs have highly transparent and easy-to-follow portfolios based on mimicking major bond index benchmarks. Therefore, the expense ratio is lower than other bond mutual funds.

The last bond fund in the table above, “Vanguard Emerging Market Government Bond,” is additionally added. Investors willing to take higher risks and returns may like to invest in the fund. It offers exposure to emerging government bonds in return for higher rewards.

Investors intending to buy bonds should consider their objectives. Bond investing is a mid-to-long-term investment. If you choose to favor stable income over capital appreciation, bond investing is an appropriate investment tool and, besides, a hedging tool in your portfolio.

While choosing between a bond ETF and a bond mutual fund, you should clarify whether you will actively and frequently trade. Choose a bond ETF if the answer is yes. Otherwise, take a bond mutual fund if it is No!

And suppose you can afford the effort to restructure a bond portfolio and save management fees by fund managers, and even design your income streams. In that case, the do-it-yourself of a bond ladder is for you, but it lacks diversifications like bond ETFs.

One more thing: You may find individual bonds or ETFs hard to find a buyer; a bond mutual fund may be the best choice because it will buy back the units from you.

No matter what choice you make, information collecting and analysis should be a go-ahead before you act. Investing is the final step of your decision. Investoralist contains a lot of in-depth expert analysis and useful information. You can also find more investment tips and questions and answers to your needs here. 

Try subscribing to the newsletter and begin to receive updated information and knowledge to avoid any investing mistakes. No obligations! Subscribe here!

What to Look for About Vanguard CD Rates: An Overview

Vanguard CD Rates

Vanguard, a household name, offers multiple financial products like stock investing, mutual funds, and ETFs. You must be aware they also provide Certificates of Deposits(CDs) service. The CDs offered by Vanguard are, to some extent, different from CDs by other financial institutions.

Vanguard offers brokered CDs service to depositors. Brokered CDs are the rates Vanguard buys in from banks and sell out to brokerage customers at very competitive prices. Vanguard makes a profit from the buy-in price and the offer price.

Vanguard buys many rate quotes from various banks across the country, therefore offering attractive CD rates to customers. Investors intending to park their money can find it appealing to deal with Vanguard as it provides a lot of competitive CD rates to various types of clients.

What Are Vanguard CD Rates?

If you think after opening an account with Vanguard, and you can deposit your money into a CD and get things done. You may be disappointed because you may be overwhelmed with what Vanguard has offered a wide range of CD products available for you to choose from.

Before we go further, you have to know a term: APY. APY stands for annual percentage yield. It is the interest earned on the principal in percentage over a year and has compounding effects by earning the interest on additional interest. It seems confusing, but you should not be worried, as the APYs stated have already been calculated and included in the rates.

The best thing about Vanguard CD rates is you can find the best rates through specified parameters. You can even find out the CD rates suitable for you based on your criteria. A current rate table is as follows for your reference:

Vanguard Brokered CDsMinimum Deposits(US)Annual Percentage Yield(APY)
1-3 months10,0000.05%
4-6 months10,0000.05%
7-9 months10,0000.05%
10-12 months10,0000.05%
13-18 months10,0000.05%
3 years10,0000.2%
4 years10,0000.3%
5 years10,0000.45%
7 years10,0000.70%
10 years10,0001.10%

As you can see, the longer the periods are, the higher the interest rates are.

How Do Vanguard Brokerage CDs Work?

Vanguard offers brokered CDs through its network of 100 dealers nationwide. Some points you have to know how they work are listed below:

  • You can set up multiple accounts from different banks. As you may know, the Federal Deposit Insurance Corporation(FDIC) offers to every account holder at a bank up to US250,000. If an investor holds more than one account or the account limit is over US250,000 at a bank, full protection of the amount per account cannot be accessible. However, at Vanguard, you can set up multiple accounts from different banks and have funds fully insured by FDIC if you have funds of more than US250,000. You have all accounts from various banks at one shop – Vanguard!
  • In Vanguard, you can implement the strategy of “CD laddering.” That is, you create a portfolio of CDs with different maturities and take advantage of reinvesting the proceeds with interest at the best rates from banks in one place.
  • The advantage of “CD Laddering” is you can control over how to control your cash flows by determining CD maturities. However, by actively managing your CDs, you should spend some of your time examining and implementing your portfolio strategies yourself. The other option is to talk to your financial advisor and make an investment plan.  
  • You can sell your CDs on the stock market and still retain the accrued interest for your own. What is more, Vanguard does not charge a commission for the sale of CDs. However, you should beware of the ups and downs of CD prices due to interest rate changes, and third parties may charge the transaction fees on the stock market.
  • Finally, you should note the principal and interest will not renew automatically. The proceeds are deposited into a Vanguard market money account upon maturity. You should renew through Vanguard’s official website or its customer service hotline.

How Much Will You Earn With Vanguard CDs?

It is a good question! It depends on interest rates and time. The longer you put into a CD account in a common market situation, the higher it earns more interest. The interest difference between CD with less than 18 months(0.05%) and 10 years(1.10%) is 1.05% from the table above. If you deposit 1,000,000 into a CD, the latter yields more than 10,000 dollars per year!

You should also remember to renew expired CDs or may not maximize the profit potential as the interest from the market money account is less than CDs’ even though it may compound the interest.

How Vanguard Compares to Other Banks

Vanguard’s CD rates are lower than some competitors. The CD offers from Fidelity are similar to Vanguard’s; however, the APYs offered are lower than some by online banks like Ally Bank and Marcus by Goldman Sachs. The following table is for comparison:

CD term lengthAlly Bank CDsMarcus(Goldman Sachs)Fidelity brokered CDsVanguard brokered CDs
6 month0.25%0.15%0.02%0.05%
1 year0.60%0.55%0.05%0.05%
3 year0.65%0.55%0.15%0.20%
5 year0.85%0.60%0.45%0.45%

What Are the Benefits of Vanguard CDs?

Vanguard is a convenience store of various CDs. Different types of CD investors find their matches in one stop. The benefits include:

  1. All types of term lengths: Vanguard covers 11 kinds of maturities from one month to 10 years. Investors can choose one easily among them. 
  2. Competitive interest rates: Rate offers from banks are available for investors basing their criteria.
  3. Fee-free sales: One of the benefits is you can sell the CDs on the market and cash out your principal and interest earlier than maturity dates. The other is Vanguard does not charge you a commission.
  4. Sophisticated app: Like other financial institutions, you can monitor your investments on the app. by Vanguard on Android, IOS, and Alexa.
  5. Extensive education resources: Vanguard also provides informative resources like videos, guides, and expert advice to invest in CDs.
  6. Ownership structure: Vanguard sets up different account structures like an individual or joint account to help CD savers to attain their financial goals.
  7. Connect outside accounts: What makes Vanguard unique is its company structure. It is a mutual company. The clients own Vanguard, so the company is more focused on their clients than other investing companies.

Things to Consider Before Getting a Vanguard CD

  • Minimum deposit: Vanguard requires initial and subsequent deposits with a minimum increment of 1,000 dollars. The other financial institutions have lower minimum requirements.
  • Simple interest: Expired CDs will not renew automatically and need investors’ further calls. The proceeds of CDs park in Vanguard’s money market funds with a lower interest rate.
  • Fee for secondary market transactions: Though Vanguard does not charge a commission for sale on secondary markets, it will charge other transaction fees related to the CD.
  • Account service fees: There is an annual account service fee of $20 charged to the account if the minimum deposit is below $10,000; however, Vanguard will waive it if you sign up for an e-statement.
  • Support: Unlike other financial institutions, Vanguard does not provide phone service beyond business hours and real-time online service.

Final Thought: Are Vanguard CDs Right for You?

Vanguard brokered CDs offer customers multiple shopping easy in one place. Investors can review quotes from different banks and make the right choice.

Besides, what is essential is investors can get full deposit protection other institutions cannot provide. They can make use of per-account and per-bank quotas to fully insure deposits of over $250,000.

Short-term investors can park their money to utilize Vanguard’s CD rates to maximize their profits as it offers various terms of CDs. Long-term investors can include them in their portfolios for further strategic investment implementation.

To maximize profits and implement investment decisions, you need insightful information and professional financial markets analysis to keep you updated. Investoralist is an online magazine providing financial knowledge and expert commentary related to stocks, mutual funds, ETFs, cryptocurrency, CDs, and investment-related information under one roof.

Just click into Investoralist for a free subscription to our newsletter and get free investments’ latest analysis.

Vanguard Information Technology ETF: What You Need To Know

Vanguard Information Technology Funds

Did you know that there is an institutionalized fund in the country that seeks to track the market index of the information technology sector? One of the greatly renowned funds is the Vanguard Information Technology Fund.  Because of its various holdings and services in the market, its low-cost ratios, and resilience whenever the market takes a hit, this ETF is something that you would want to consider buying and engaging your assets with.

But what is this infotech ETF, and how can this help you as an investor? Read on to find out.

Vanguard Information Technology ETF

Vanguard information technology ETF (also known as VGT ETF or sometimes VITAX ) is one of the most renowned funds that are passively exchanged and passively traded in the market. You can also buy and sell these shares just like individual stocks. The VGT is one that tracks the information and performance of the technology sector, whose holdings give weight to the market cap. This means the bigger the company in the sector, the bigger the percentage allocated to the fund.

The technology sector is one that covers a wide array of companies, including tech-forward service companies, chipmakers, e-payment processing industries, as well as software and hardware companies.

Also, the VGT is a fund that gives opportunities to investors in getting exposed to the largest tech companies in the sector–so if you would want to have a diversified financial-tech portfolio, Vanguard will work best for you.

Why do You Need to Invest in Vanguard Information Technology ETF?

What makes the Vanguard Information Technology Index Fund interesting is that the assets that it holds include stocks that belong to highly-concentrated tech areas inside and outside of the United States. 

They hold tech stocks for small and large companies, but the large ones provide the highest returns and best performances. They also track company indexes that work around the industries of tech-based services and products, as well as tech-based research and development industries.

Vanguard considers the Info Tech Index Fund as one that’s aggressive, and would work well for those investors with a rather high-risk tolerance. The high risks would pose a mixture of both growth and decline on its share prices, which is why it is a good choice if you think that long-term investment is something that would interest you.

One more thing that you would need to know is that Vanguard’s funds are known to have low-cost indexes, amidst a wide selection of both exchange-traded funds as well as mutual funds.

What else are the reasons why we should place our investment in this VGT Index Fund? There are four main reasons:

1) Investment Strategy

An investment strategy is key when it comes to making sure we spend less on overhead expenses, with the most efficient yields and gains at the same time. This Vanguard Info Tech Fund is one that tracks performances and invests on all of the assets included in the stocks that comprise the benchmark index.

Because of the tracked stocks in this index, it serves as a good investment strategy for those who are looking for more extensive exposure in the Information technology sector in and out of the United States.

2) Role in Portfolio

Because of being exposed to a wide array of financial portfolios in the market, Vanguard Technology ETF becomes something highly supplementary to parts of the stock allocation for the investor portfolio. Again, the more exposure to the technology sector, the better the funds’ role becomes for your financial portfolio.

3) Easy Management

Even if this technology ETF is considered to be one that’s aggressive and poses a higher risk for investors, the fund is also considered as one that’s relatively easy to manage. With a low cost and expense ratio, investors are given the opportunity to manage their funds accounts for themselves.

4) Top Performance

Vanguard  Information Technology ETF VGT is also considered to be the prime performer in the market, after having yielded 34.72% of returns just last year. Furthermore, it also yielded a remarkable 23.6$% of returns over the past three years, and 23.56% throughout the past five years. Decade-wise, the fund performed with a yield of 18.95%, given the ten-year data.

As provided by U.S. News.com, the following table shows the performance of the Vanguard fund:

1 month3 month6 month1 year
Vanguard12.52.928.9743.46
MSCI ACWI NR USD12.336.0622.2915.01
Rank in Category69886559
Category (ST)14.819.8334.9549.78
+/- Category (ST)-2.31-7.64-5.98-6.32
+/- MSCI ACWI NR USD0.17-3.876.6828.45
Updated 11/30/20

Things to Consider when Investing in Vanguard Information Technology ETF

 1. Costs and Fees

One thing that you should consider is that there are mutual fund charges as well as expense costs that may hit investors who are in possession of mutual funds. It should be understood that when you run a mutual fund, it will always include operational costs–which include transaction costs, fees for investment advising, as well as expenses on distribution and marketing ventures. Various funds make investors pay for such overhead expense ratio 0 in a wide array of ways. Let’s take a look at a couple of fees:

  • Maximum Sales Fees

The initial sales fees incurred by investors are usually those that are being paid to brokers in the form of a commission. On the other hand, deferred fees are charges incurred when investors choose to redeem their shares from the market.

  • Maximum Fees

Maximum fees are those being charged to fund holders every year (which you could think of just like some sort of annual membership fee).

  • Actual Fees

Vanguard has a very low net expense ratio of 0.1%, where the average expense ratio in the market is at a staggering 1.26%.

Management fees for the fund are pegged at 0.09% amidst the category average of 0.78%.

  • Total Cost Projections

Total cost projections are those that predict how much you, as an investor, can expect to spend in expenses/sales-related charges and fees.

  • Minimum cost on investments

When opening an account for investing, some funds would require a minimum cost on investments, which serves as an initial and principal payment to the fund.

2. Risk Considerations

The next crucial thing that you should consider when engaging your assets in the stocks is the risk. In the context of the Vanguard fund, you should know that it focuses primarily in the information technology sector. Therefore, if there are funds out there that give focus on other equity sectors outside their domain which is on information technology, then it is prone to risk that’s particular to that particular investment.

Investors, in turn, will experience higher volatility because of the lack of diversification caused by the issues impacting the specific sector. Consequently, the impacted sector will manifest into poor performance

  • Volatility Measurements

Volatility measurements are those that serve as a mirror towards risk and uncertainty on the value of the underlying securities involved.

Vanguard’s information technology fund has a standard deviation of 21.108 this year, which shows how varied the returns of the fund are, relative to its average performance over time. Therefore, the higher the returns of the fund, the greater the standard deviation it will gain.

Furthermore, the Sharpe Ratio of the Vanguard Information Technology Fund ETF is pegged at 1.04. The Sharpe Ratio is used in measuring how much risk can an investor expect to take when calculating investment returns.

Lastly, the Mean of the Vanguard Information Technology is set at 1.964 this year. The mean is a metric that makes us understand how well the Vanguard fund performed given data on annualized returns.

  • Modern Portfolio Theory Statistics

Theory statistics are important in understanding the competitiveness of a fund. With modern portfolio theory statistics, comparisons can be made in checking excess returns of the funds vis-a-vis the performance of a benchmark index. Data for this metric are in reference to three years of data on monthly returns.

There are three measures to identify such data: the R-squared, the beta, and the alpha.

What you Need to Remember

One interesting fact: the previous years have been very beneficial to most of the tech-concentrated financial portfolios. Just last year, the Vanguard Information Technology ETF has successfully gained a 48.8% dividend yield. This overpassed the S&P 500 returns on net assets, with only 28.9% that year. 

The Vanguard Information Technology ETF is a cap-weighted financial portfolio as well, despite its median market cap that is topping one hundred seventy billion dollars, which is the 10 largest holdings account, taking up 57% of the financial portfolio.

You also need to remember that Microsoft and Apple Inc are the top two amongst the top 10 holdings in the ETF industry net assets. Because of this, they both serve as the United States’ most valuable publicly listed companies. These companies hold more than 33% of the investments and the ETF portfolio.

Aside from Apple, and Microsoft, you should know that Visa Inc and Mastercard also fall under the next two of the largest holdings in the market. They are benchmarks that the Vanguard ETF is also tracking, as they are heavily involved in electronic payment processing, software development, among others.

Even if Vanguard ETF is an aggressive fund, you won’t have to account for the fall or the rise of the outstanding shares because it works very similarly to how we perceive open-ended mutual funds. The cash balance expands and contracts organically so you wouldn’t have to make active trades all the time, as opposed to a traditional index fund. Plus, the Vanguard ETF has a 5% portfolio turnover rate.

Conclusion

The Vanguard ETF is one that gives investors the best of both worlds. They offer investors a wide array of proven and strong technology-based stocks in the market with very low expense cost ratios. 

The Vanguard ETF will be volatile if the stock market goes through a crisis, and the downfall can suffice if investors trade out of tech stocks. Regardless of all these considerations, if you track the performance of the fund, you will realize that at the end of the day the Vanguard Information Technology ETF is beneficial to the average investor and is worth the buy. 

Given the costs, the exposure, and the opportunities, in the long run, this ETF will totally help boost your asset class, as well as your portfolio.

If you need more information on investing and anything financial-related, let Investoralist help you out! Investoralist is a site that can help you understand, engage, and get empowered on everything related to your finances.

Vanguard Roth IRA: Is It the Best Roth for You?

Vanguard Roth IRA

Retirement isn’t an easy matter for people without prior planning. As you age, you may wonder if you have done enough to your savings plans for peaceful retirement! A terrible fact is most American to-be-retirees are not saving enough and could have work harder and longer to have a decent life in retirement.

The Roth IRA offers one of the solutions to this problem. 

Why Vanguard Roth IRA? 

First, let’s talk about a traditional IRA and a Roth IRA, and you may have heard the differences: A traditional IRA is a tax-deductible plan, you can make deductions about your contributions in your tax return. A Roth IRA is not tax-deductible for contributions but tax-exempt at retirement.

Tax treatments make the principal difference for these retirement plan participants. If you choose Roth IRA, Vanguard accounts offer many benefits other institutions do not provide. 

They include low-cost funds and a wide selection of funds, and so on. Vanguard IRAs have more than 200 funds to choose from, and they are noted for offering low-cost funds in retirement plans.

Whether you are a general or annuity plan participant, you had better consult your tax or investment advisors, or retirement plan sponsors consultants as your first plan for the long-term. The nature of your retirement plan involves investment risks, tax aspects, and other life planning goals. As an investor for your retirement plan, you should talk to your close family member regarding joint plans with you like college savings or other specific life-goal settings.

Significant Benefits of a Roth IRA

Some attractive incentives are drawing people to Vanguard Roth IRAs; they are following but not least of all:

1. Low Costs

It is a truth Vanguard provides low-cost funds in the mutual fund industry. Their average fund fees are 0.1% compared to general funds of 1.5% on average. The benefits are enormous when you are talking about the snowball effects of cost savings by 1.4% expenses. One more thing to note is the low-cost policy also applies to actively managed investments and exchange-traded funds(ETF) besides index funds.

2. Wide Selection of Funds

You can benefit from the vast range of mutual funds within the Vanguard fund family. Just imagine there are more than 3,100 mutual funds for you to choose from, and more than that, costs for the exchange-traded funds are mostly commission-zero on Vanguard Roth IRAs. But you should note you may pay commission for Vanguard funds at other brokers’ accounts.

3. Tax-Free Growth

Unlike traditional IRAs, Roth IRAs grow your assets free of tax. Furthermore, as contributions belong to income after tax, they will not be subject to capital gains and dividend or income tax in the future. That will benefit plan investors and plan participants. Future tax is a strange thing. Besides helping to spiral the asset base, your family members can benefit from an inheritance gift. You should consult your estate lawyer before investing in this plan.

4. Tax-free withdrawals in Retirement

What makes investors or retirees popular is you can withdraw the money free if you meet some criteria like a 5-year rule. According to Internal Revenue Service, provided you are 59 ½ years old and own your Roth IRA for five taxable years after your first contribution, you can withdraw your money from whichever Roth IRA account there is (if any).  

5. Flexible Withdrawals

More than that, retirement plan participants can even withdraw contributions anytime without tax if certain conditions are met. That said, if people can take the money out of their Roth IRA accounts under the conditions: 1. Buying of a first home, 2. Disabled, 3. Dead, 4. Paying certain medical expenses unreimbursed or due to loss of jobs. 5. Paying children higher education expenses. 6. Paying childbirth or adoption expenses.

What are the Pitfalls of a Vanguard Roth IRA

  • Trading Costs

Though most of the trading commission for Vanguard’s funds are low to zero, you may have to pay a commission fee of up to $20 if you buy funds at other brokers other than Vanguard’s. If you intend to frequent trading of your brokerage assets in your Roth IRA account, you may incur a high cost and subsequently hurt your returns. I would suggest you use a buy-and-hold strategy to grow your investments.

  • Fund Minimums

You will find Vanguard brokerage services offers Roth IRA service, but you may be disappointed they impose a minimum investment of at least $1,000. At the same time, other brokers do not have this requirement for retirement plans. It increases the hurdle for people to open a retirement account if they want to directly invest in Vanguard’s mutual funds.

Some Powerful Vanguard Mutual Funds for Your Roth IRA 

When you think of Vanguard funds, you think of low-cost funds and a wide range of choices. However, there are three special funds you should take note of:

1. Vanguard Total Bond Market Index Fund(VBMFX)

The fund invests mainly in the US bond market. The holdings for the bonds are investment-grade and spread across different maturities. The investment goal is to provide a steady income and low volatility for fund investors. Furthermore, the tax for interest payments is also deferred in Roth IRAs.

The yield for the fund is currently 2.63%. It holds more than 8,500 funds in the portfolio with almost $200 billion in assets under management as of October 2018. More than 60% of bonds come from US Government, and the remaining go to corporate sectors of primarily finance and industries. The average maturity is 8.6 years, and the expense ratio is 0.15% low. The required minimum investment is $3,000.

2. The Vanguard Total Stock Market Index Fund(VTSMX)

As the name implies, the fund invests in the US equity market with high volatility. Major long-term investors hold heavy in their portfolios. They offer long-term growth by asset appreciation. The assets under management are more than US750 billion with well-diversified securities of 3,680. The major sectors are technology, finance, healthcare.

3. The Vanguard REIT Index Fund(VGSIX)

The investments of the fund hold real estate projects. It can diversify the risk of owning stocks and bonds. The fund buys office buildings and hotels, and malls for rental income and price appreciations. Besides, it has 31.5% of its portfolio in specialized REITs(Real Estate Investment Trust), of which 14.80% is retail REITs, and 13.5% is residential REITs.

As of Oct 2018, the fund holds 184 stocks and has 59.4 billion under asset management. The unadjusted yield is 4.16%.

Are there other options?

Except for Vanguard funds, there are alternatives available for Roth IRA investors. Through the following plan, participants can change their preferences when they change their goals. Remember to talk to your financial or retirement advisors for opinions suitable for your purposes.

  • Brokers

You can choose traditional or online brokers to open a Roth IRA. Just pay a visit to their stores or official websites for personal investors. It takes not a long time to open an account. Some advantages with a broker account are 1. They have no management fee. 2. However, you have to pay a fee similar to an expense ratio when you buy a mutual fund. 3. You may have to pay a commission whenever you buy or sell an investment though the trend is going towards zero one.

  • Robo-Advisors

A new trend: Robo-advisors help you invest! It’s also called digital advisors. You pay a fee, and a Robo-advisor picks the stocks and bonds for you. If you like things other than human advisors to manage your portfolios, you may give it a try!

  • Banks

A traditional way for people to go is to open a Roth IRA with a bank. There are some pros and cons about bank IRA. CDs( Certificate of Deposits) are offered to their clients for principal investments tools if you have an IRA with them. 

The point is if you have a mid to a long time to retire, you may miss chances for growing your nest eggs as CD yields are much lower than stocks and bonds. 

You should consider the time when planning to invest for your retirement. Though higher volatility, stocks and bonds are ideal candidates for long-term investment tools to grow your assets. 

If you are just several years into retirement, safe and low-yield CDs may be an appropriate option.

Frequently Asked Questions About Roth IRAs

How do I open a Roth IRA?

Opening an IRA is quick and easy. Get some personal information ready like contact number, address, social security number. Choose your provider and select types of investment tools suitable for your unique situations. You can pay visits to providers’ websites to see their latest offers.

How much do I need to open a Vanguard Roth IRA?

Vanguard itself does not require a minimum to open an account. However, the mutual fund you intend to buy may demand a minimum. It depends on individual funds’ minimum criteria. 

Can I open a Roth IRA with Vanguard?

Yes, but you should note income limits and contribution limits are available for tax purposes. You should review the information and consult with your consultants before opening an IRA and invest.

Who has the best IRA?

Every IRA provider has its unique offers and features. Combining the factors mentioned earlier with your circumstances, you can find your suitable IRA. Remember to discuss with your advisors!

Is a Vanguard Roth IRA free?

It is up to the investment tools you plan to adopt. Investors may bear some costs like stock trading fees and mutual fund expenses. Besides, Vanguard will charge $20 for the annual subscription fee if you don’t register for an e-mail statement.

Final Words

A Vanguard Roth IRA is more than just a retirement planning tool for you as an investor. Through their wide range of fund choices and low-cost features, you can grow your asset base for different purposes like education and other life goals.

More than that, you enjoy tax-free growth and flexible treatments at withdrawals from your Roth IRA. You should remember the nature of a Roth IRA: long-term savings account and tax-efficient investments. A participant should consider the two factors in planning their financial future. 

If you make frequent trades in your IRA, you will incur higher expenses due to the selling and buying of assets. Costs related to early withdrawals and tax issues may reduce your returns in a compounding way. The best strategy is buy-and-hold for your investments. Therefore, apart from discussing it with your professionals, you need to research more finance and investment resources. 

Investoralist provides in-depth analysis and detail regarding Roth IRA and other related retirement products for readers to have a clear picture of personal financial planning. Subscribe to the newsletter for more information.  

Roth IRA Fidelity Review: Best Retirement Account for Several Reasons

Roth IRA Fidelity Review

Whether you want to grow your savings or diversify your investment portfolio, a Roth IRA is a great choice that comes with long term tax benefits. Roth IRA is overall the best retirement plan available today that offers tax-free income.

Pros

  • There are no minimums or account fees to open a Roth Fidelity IRA account
  • It offers a large variety of investments choices
  • Trades are commission-free
  • High potential for tax-free withdrawals and growth upon meeting the set conditions
  • Free investment tools such as calculators, apps, and software
  • Extensive information and research data available for investors
  • Some mutual funds have no expense ratio

Cons

  • Some mutual funds are high cost and attract high transaction fees
  • The robo-advisor service charges a higher-than-average annual advisory fee for balances over $50,000 compared to other competitors
  • Fidelity Roth IRA does not provide access to cryptocurrencies, futures, forex, and other riskier assets
  • You have to invest for at least 5 years initially before making any withdrawal

Fidelity Roth IRA is an excellent choice for beginner investors or anyone looking for their first Roth IRA. It offers one of the best self-directed investment platforms, with a wide variety of investment options, and minimal trading fees. 

Features

From tax advantages, maximum contribution, and fees, here are some details that can convince you to consider a Roth IRA. 

Tax advantages: The concept behind Roth IRA is that you make contributions to this account with after-tax money. Once you turn 59½ and have been in a Roth IRA plan for five years, all distributions taken from the plan are tax-free. You can withdraw your contributions without incurring any tax or penalty expenses at any time. 

Maximum contribution: $6,000 ($7,000 if age 50 or older)

Income requirements: In 2021, the upper limits for investing are $125,000 for a single person or $198,000 for married people filing jointly.

Minimum investment: There is no minimum to open the account

Investment options: Fidelity Roth IRA is great for independent investors who want to access a wide range of investments. With Fidelity, you get access to trading stocks, bonds, options, and a vast choice of ETFs. You also get access to great mutual funds both from Fidelity and non-Fidelity.

Support & guidance: When it comes to investing, you are responsible for choosing and managing your investments. Great thing is that you can access all the tools and information that the platform provides.

For the Fidelity Roth IRA, investments are managed for you, using your goals and risk tolerance set in your digital account. You still get to access Fidelity’s information repository, as well as a Fidelity advisor whenever it’s necessary.

Fees: There is no opening cost, closing cost, or annual fee, and offers $0 commission 

Why choose Fidelity Roth IRA?

Beginner-friendly: Fidelity has invested heavily in the platform’s infrastructure to make it easy for customers to find tools and features. Fidelity provides access to a well-developed information section, which builds the confidence of customers who are new to investing.

The platform also makes investing easy through user-friendly layouts for making orders.

No minimum or recurring fees: Fidelity Roth IRA does not charge for account opening or annual fees. The account also offers low transaction fees using an order-routing technology that reduces transaction costs by seeking out price improvement.

Extensive and complete trading tools and resources as a full-service broker: Fidelity Roth IRA offers investors abundant online help and a well-versed chatbot that can respond to any customer queries.

One of the best commission structures at $4.95/trade: Fidelity Roth IRA offers one of the lowest fee structures in trading, at only $4.95 per trade for ETFs, options, and stocks. They also have many commission-free mutual funds to invest in.

Flexible investment types: Fidelity allows you to trade in virtually any type of investment available on Roth IRA.

No expense ratio for mutual funds: 4 of the mutual funds that Fidelity offers have no expense ratio. This means that you can invest in these mutual funds and manage them in your account at zero fees.

Local branches availability: Fidelity has over 140 branches in major cities across the country in case you need hands-on customer service.

Where Fidelity falls short 

Higher fees for some of the mutual funds: Of all the mutual funds available for investing in Fidelity Roth IRA, only 4 of these funds have zero-commissions. However, all other mutual funds attract a $49.95 fee per trade.

Higher pricing with robo advisor competitors: To access robo-advisor services, you pay a 0.035% per annum management fee and the minimum initial investment has to be $5,000 

With Fidelity Roth IRA, you don’t have access to options such as Forex, Crypto, and other riskier assets

Fidelity vs other investment firms

Fidelity

  • Unique feature: Availability of extensive information and resources to learn to trade
  • Commission: 0%
  • Best For: Beginners interested in different investing options

Charles Schwab

  • Unique feature: Access to a robo advising services at no extra management fee
  •  Commission: 0%
  •  Best for: Beginner and advanced traders seeking for no-minimum index funds

TD Ameritrade

  •  Unique feature: Offers a combination of platforms that allows both beginners and experienced traders to access their investments
  • Commission: 0%
  • Best for: Active investing and trading

Betterment

  • Unique feature: Traders have access to automated investing and managed portfolios through robo advising
  • Commission: 0.25%
  • Best for: automated investments that balance a portfolio over time

SoFi

  • Unique feature: Easy investing experience offered through mobile and web platforms.
  • Commission: 0%
  • Best for: Active investing

Best Roth IRA IN 2021

Fidelity Roth IRA tops the list of best Roth IRAs in 2021 for several reasons. The account offers commission-free trading for stocks, ETFs, and more than 3,400 commission-free mutual funds.

In addition to offering the best trading platform with lots of information and research on investments, investors can access a tool suite of calculators and software to help in improving their investments and achieve their retirement goals. These tools include the Fidelity Spire app and Retirement Score Calculator.

When investing in Fidelity Roth IRA, mutual funds are obviously the best investment option to take. One of Fidelity’s solid mutual funds is the Fidelity 500 Index Fund (NASDAQMUTFUND: FUSEX) which has one of the lowest expense ratios of 0.010%.

Individual stocks are the second-best Roth IRA investment. However, it’s necessary that you go for those with high growth potential, even though they may not work out as you expect. 

Other things you need to know

Is Fidelity good for Roth IRA?

The Fidelity Roth IRA ranks as the best for various reasons. First, Fidelity Roth IRA accounts have no minimum account balance or any recurring account fees. The account also offers more than 3,400 mutual funds that attract zero transaction fees and commission-free trade on ETFs and stocks. 

How much does Fidelity charge for Roth IRA?

Fidelity Roth IRA has no opening cost, closing cost or annual fee. In addition, there are no commissions for online stocks, ETFs, and options trades.

How is a Roth IRA different from traditional IRA?

A Roth IRA and Traditional IRA are both great accounts to consider for retirement investing. However, there are key differences between these two accounts that are notable.

While Roth IRA allows you to make after-tax contributions, you can make pre-tax contributions with a traditional IRA.

A Roth IRA is suitable for an investor who expects to be in a higher tax bracket at the time they start making their withdrawals. On the other hand, a traditional IRA is great for an individual who expects to remain in the same tax bracket when starting to make the withdrawals.

The only downside to a Roth IRA is that, unlike in traditional IRAs, there is a cap to the maximum contribution amount allowed.

Does Fidelity Roth IRA payout interest rates?

Fidelity Roth IRA does not pay out any interest as it is not like other traditional savings accounts that are set up in the banks. Fidelity Roth IRA is a type of investment account that holds assets and earns returns depending on how the assets perform.

Who is eligible to contribute to a Roth IRA?

For you to contribute to Roth IRA, you must have earned income. If you are married, you can make spousal contributions even if your spouse does not have earned income.

However, you cannot contribute to a Roth IRA if your income exceeds $140,000. For people under 49 years or younger, you can only contribute up to $6,000. For people above 50 years, the limit to your contributions is $7,000.

What is a Roth Conversion?

A Roth conversion involves making a withdrawal on your 401(k) and traditional IRA and converting it into a Roth. Ordinary income taxes are incurred on the withdrawal amount, but you do not incur early withdrawal penalties.

Roth conversion works for investors who want their income to grow tax-free. 

Anyone can convert their IRA assets to a Roth IRA, regardless of income or marital status.

How much should you consider converting? 

With a conversion, you pay income taxes on the conversion amount. That’s why when determining how much to convert, you have to consider how much money you have saved in non-retirement funds to pay the taxes. Fidelity also suggests converting over a number of years in amounts that will keep your income from the conversion within your current federal tax bracket or within your desired bracket. 

Conclusion

If you are just starting to plan out your retirement plan, Fidelity’s Roth IRA is the best choice for you: it does not have a minimum deposit account and it does not require account opening or maintenance fee. 

Fidelity Roth IRA investment account offers you a unique opportunity to invest in a wide variety of Fidelity investments and manage them all on your own. With the ability to invest in multiple trading options and accrue tax-free income, Fidelity Roth IRA is a great way to invest in your retirement while avoiding high tax liability that other investment options present to traders.

To learn more about financial planning, retirement plans, and a wide range of investment products, subscribe to our newsletter.

Index Funds for Dummies: Beginner’s Guide

Index Funds

Investing can be a daunting task! If you are annoyed by daily market ups and downs as a beginner, I will show you how to make index fund investing successful.

Index fund investing is a suitable fit for dummies or newbies. It provides a hassle-free solution for you to focus more on other essential things in your life. 

In the following, I will explain what you should know about index funds: 

  • the nature and mechanism of index funds
  • the pros and cons of index fund investing
  • how to identify and choose a good index fund; d. finally, I will show you where to find sources on index fund investing.

What is an Index Fund?

An index fund is a pool of funds to build a portfolio of assets by mimicking market indexes’ composition. Let’s take an example of some well-known indexes like the S&P 500 index and Nasdaq composite index.

A manager of an index fund regularly buys and adjusts stocks based on the components of an index, e.g., the S&P 500, according to the combinations of securities in the index.

It is an easy, passive, and no-brainer investment tool for a newbie investor without requiring too many deliberations. In other words: if you invest in the S&P 500 index fund, you have already invested in the most giant 500 corporations in the US. Just imagine how comprehensive your investing plan is!

Major types of indexes for index funds

The famous investing guru, Mr. Warren Buffett, encourages people to invest in index funds regularly and claims it is a safe bet for most people. The late John Bogle, the founder of Vanguard funds – one of the largest index funds in the US, says index fund investing is the most transparent to investors. 

Currently, there are various sorts of index funds available for investors. They include:

  • Nasdaq Composite made up of 3000 stocks listed on the Nasdaq exchange.
  • Dow Jones Industrial Average (DJIA), consisting of the 30 largest blue-chip companies.
  • Bond index: Bloomberg Barclays US Aggregate Bond index.
  • Russell 2000, comprised of US small-cap companies.
  • S&P 500, the largest 500 US companies, is listed on the New York Stock Exchange.
  • MSCI EAFE, consisting of foreign stocks from Europe, Australasia, and the Far East
  • Wilshire 5000 Total Market Index, the largest U.S. equities index

The investment scopes of index funds can even cover more like specialized industries, currencies, and commodities, but they are riskier for non-experts.

Are Index Funds ideal for dummies?

Index funds are a member of a family of mutual funds. They belong to passively managed pools of investments in the indexes and broadly represent movements of market changes. 

As a result of this, index funds have become popular among the general public. They are in use widely for different goals in sorts of stages in life, including:

  1. Retirement: you can buy it through your 401(K) or individual retirement account. You don’t always need to watch your portfolio because market changes reflect your portfolio’s.
  2. Education: shares of index funds are available for sale from mutual fund companies; therefore, you can buy them for your children’s education expenses.
  3. Wealth accumulation: If you want to save for future use or rainy days, you may consider buying index funds through a brokerage house.

Index funds are an easy-go managed tool for beginners if you are just a newbie or dummy in aiming for long-term investing.

How does the Index Fund Work?

As you know, an index fund is a pool of investments made by modeling on the securities of an index like the S&P 500 index. When you buy an index fund’s shares, you acquire all the stock holdings based on the index’s securities proportionally. 

Moreover, you can also purchase the funds share(e.g., SPY, QQQ) in business hours if listed on the stock market(New York Stock Exchange). 

Like a stockholder, you will get the dividends, interests, and capital gains regularly when the stocks or bonds pay. Even if the shares of an index fund are not listed on the stock exchange, you still can buy the securities based on the last working day’s price.

How to weigh index funds

As different combination methods calculate market indexes, index fund managers have to adjust the portfolios regularly and match an index’s weighting according to changes. The calculation methods of index mainly consist of 3 widely used sorts:

  • Price-weight index: This index takes the prices of the securities it holds into consideration. Securities of higher prices have a higher weight in the index. Dow Jones Industrial Average(DJIA) is the price-weight index. As the components’ prices determine an index’s weight, managers have to adjust the portfolios’ pricing to match the index weight accordingly.
  • Market-cap weight index: Each security’s market capitalization determines the weight of the index. Standard & Poor’s 500 index(S&P500). An asset’s high market cap has more impacts on the index, so has a market-cap weighted index fund. Managers have to adjust the changes in market cap changes in line with the index.
  • Equal weight index: It consists of equal proportions of securities in the index. S&P equal weight index(EWI) is one of the indexes. Managers do not change their portfolios frequently as the weighting is the same no matter the prices and market capitalization changes.

To recap, more rebalancing of portfolios is necessary for price-weight indexes, and vice-versa, least is for equal weight indexes.

Is an index fund investing passive investments?

Yes, it is! The actively managed fund has a goal of outranking the index; therefore, managers have to find market opportunities and determine strategies to manage their portfolios like buying, selling, and even hedging. 

However, it may incur more risks and expenses. In the long term, the strategy may not outperform the passively managed ones.

What are the Advantages of Index Funds

  • Long Term Performance: According to SPIVA statistics and Reports(SPIVA), almost 70% OF US large-cap companies cannot beat S&P Dow Jones Indices over the past five years until the end of December 2019. Even only one-third of mid-cap companies beat Standard & Poor’s 500(S&P 500) in one year. 

If we look further, only 13% of actively managed funds outperform the S&P Midcap 400 growth index over the ten years, according to investor’s business dailies. Advocates argue that few people can beat benchmark indexes; most of the wins are probably due to costs and lucks. Index funds invest based on the market indexes; therefore, they can generate better returns.

  • Lower costs: Index funds incur fewer costs than actively managed funds: 

1. Operating costs: trading costs are less because fewer trading activities occur, research and analysis(R&D) are almost zero as the components of index funds are in line with indexes.

2. Taxes: taxes related to trading and capital gains are less than actively managed funds. 3. Administration cost: Actively managed funds hold a larger staff than index funds and consume more expenses. They charge 0.75% to 1% more than index funds typically.

  • Transparency: Index fund components are reflective of that of the benchmark index. Expense allocations are clear and straightforward, and investment strategies are passive by copying the index ones. It is easy to understand how index funds work and what the fees are all about. If a beginner or dummy is mindful of complicated investing, he will most likely like the mechanism of index fund investing.
  • Diversification: Most index funds invest in major US indexes. The Dow Jones Industrial Average(DJIA) indexes and Standard & Poor’s 500(S&P 500) cover mainly blue-chip companies and various economic sectors and are nearly representative of the US economy. If you invest in the indexes, you invest in almost all sorts of sectors of the economy. 

The benefits: by investing in cross-section investing, you can reduce the risks of investing in only one industry and one company. That means: if you only invest in one sector or one company like textile manufacturing, you may suffer the loss as to the decline of the apparel industry, etc. 

In other words, you may not lose your bets by only investing if it suffers from a loss like Enron or Worldcom. Diversification means more protection to the index fund investors, especially to the new investors.

What are the Disadvantages of Index Funds

  • Lack of flexibility: As the name implies, index funds cannot invest more than it allows beyond the securities specified. Investors may miss other opportunities for returns. 

Moreover, managers have little discretion to change the portfolio’s combination by mimicking the index, which may lead to a loss of chances of profiting from the proportions of climbing stocks. 

For example, Tesla(TSLA) was recently added to the Standard & Poor’s 500; what if the security had been added to the index one year earlier or managers could buy the stock at will without any restrictions. The consequence: the returns for the index fund might become a different one!

  • Rarely outperform the index: Index funds are designed to model a benchmark index, so the intention is not to exceed an index’s returns.

If the market crashes, managers of the index funds can do little to stop them except sticking to an index’s components. They cannot sell to prevent the loss and buy more than specified to increase profit if the market climbs again. 

Moreover, index fund investors earn fewer returns than an original index delivers after paying expenses. However moderate the costs (depends on individual funds), the returns from index funds are mildly smaller than the market, and may contradict what ambitious and young investors intend to do!

  • Tracking error: Except for the above restrictions, index fund performance may vary from one to one even though all invest in the same index. 

The performance of respective managers is primarily attributed to the benchmark called tracking error. Managers have their discretion as to when to invest and create different prices for a stock. Consequently, a large index fund has more advantages of getting a favorable price for a stock than a smaller one. 

According to the benchmark index, a fund manager with a large cash flow may have a hard time converting the cash position into stock positions. Finally, not every index fund has the same tax position. It may likely affect an index fund’s performance! The benchmark error for passive index fund managers is a plus and minus 0.5%.

  • Management differences: There are no clear regulations for “index fund.” As the term index fund becomes more popular, index fund companies have their interpretations on naming and investing in an index fund regarding expenses and even portfolio combinations. 

Some index funds may seek active investment strategies to achieve returns above the index. This may increase the risks and easily confuse investors, especially beginners, under the umbrella of the name “index fund.”

How Should I Choose an Index Fund?

  • Risk tolerance: According to Investopedia, risk tolerance is a measure of the extent of investment loss an investor is willing to put up in the process of investing. 

Before investing, a financial planner will give investors options on what they can endure if their holdings crash, e.g., 25% or more: 

1. Sell all the holdings

2. Sell part of the holdings

3. Hold

The first one is conservative, then moderate; the final, aggressive. Risk tolerance differs on age, income, and attitude. A young investor may have high-risk tolerance with market swings relative to an aged one because he believes there is enough time to recover the loss. 

A high-income earner may endure more risks because he can earn it back in the future. An aggressive investor is more likely to bear more loss than a conservative one.

  • Fees: Charge fees by index fund companies varies to some extent. The annual expense ratio generally is 0.09% for stock Index funds and 0.07% for bond index funds.

An investor should look at the expense in detail; it affects the returns in the future. As to more charges, the longer one invests in index funds, the compounding effects of fees on returns will grow larger.

  • Time horizon: No wealth is created without time! Investing horizon makes a significant impact on everything about returns. The more time we let investments grow, the more returns we accumulate. Therefore, a reasonable investing period should be set up beforehand!

An investor should talk to his financial advisor before making any decision as to his investing goals. Besides, a financial advisor should regularly review changes related to risk tolerance. Investors should have their portfolios reviewed every half a year at least.

  • Index fund operating strategies: An investor should review the index fund operating policies before investing in an index fund. As said, some funds may allow managers to lend securities or cash to increase profits. 

The practice seems to increase the returns but also raise the risks to investors as well. A conservative investor should avoid this kind of index fund with this trading policy.

5 ways to identify a good index fund

  • A good index is transparent: A good index should consist of 2 significant factors: 

1. The purpose of the index.For example, the Standard & Poor’s 500 index is designed to measure the US’s top 500 companies’ performance and a capitalization-weighted index. Of those, most market-cap companies have a major impact on the combination of the index.

2. It should have breadth. Russell 3000 index consists of 3000 publicly listed companies in the US and covers almost 98% of the publicly traded market. Therefore, whether new or experienced, investors should clearly understand the indexes they will invest.

  • There is minimal turnover: As an investor, Imagine you encounter an ever-changing index and are aware it frequently changes components. 

As a result, the manager has to frequently rebalance the portfolio in line with the changes and increase the administrative and trading costs. 

Furthermore, the credibility of the index may be in question due to this inconsistency. It may become difficult for investors to track and follow. A trustworthy and highly authoritative index should include a stable and steady combination of components.

  • The index is logical: Better know-how helps you make better decisions! 

Let’s take an example–the stocks in the Standard & Poor’s 500 index are selected based on eight criteria: market capitalization; liquidity; domicile status; public float; global industry classification and standard of the industries in the economy of the US; financial viability; length of public trading time and exchange. The index is calculated based on a market capitalization method. 

The calculation is open and logically understandable. You may suffer a considerable loss if you make a wrongful decision based on misinformation and unclear grounds offered by an index fund.

  • The index is relevant to the real world: Investing is all about “invest for growth.” Growth is for the economy, industry, and enterprises. 

Think if you intend to invest in MARS, you may not currently see the growth potential because a method for index calculation is hardly justified and unpracticable. However, you are to feel confident in investing in companies contributing to industry and economic growth. 

That said, a reliable index must comprise:1. productive companies for real growth for investors; and 2. long-term nature for wealth accumulation. Indexes like DJIA, S&P 500, and Russell 3000 meet the above criteria.

Are Index Funds A Good Investment?

Markets are full of unknown factors! Whether you are an experienced investor or a dummy beginner, you may sometimes be caught up by sudden unexpected events within. 

There are some occasions when you may have to react panicky or hilarious even though you think you are well prepared. These kinds of Irrational behaviors can dominate your mindset and cause major loss to your investments.

Index funds provide a platform for new or experienced investors to follow and benefit from the corporation’s growth. The advantages are:

  1. you don’t need special knowledge to participate in the game
  2. You can participate in a wide range of investment tools and diversify the risks\
  3. As most investors cannot beat the market, index fund investors will let investors gain the rewards handsomely if you choose to invest in index funds wisely( I will tell you later in the following).
  4. Due to its low cost, simple mechanism, and transparency, index funds are appropriate tools for general investors, especially investing beginners.
  5. Finally, they are ideal vehicles for long term investors planning for children’s education, retirement, traveling, raining days purposes.

If you have a long-term investment concept, you should consider the benefits index funds will bring. Good preparations are the first step towards your financial goals. 

Closing 

Various kinds of index funds can make you dizzy as you have to spend a lot of time combing through the racks standing inside the fund houses. So, information gathering is the first-go task. 

Financial intelligence sources like TV: Bloomberg, Reuters; financial newspaper, e.g., Wall Street Journal, Financial Times; online magazines like Investoralist; Barron’s. They provide information and analysis relating to the index funds industry. 

Besides, Investoralist also provides in-depth knowledge and comparisons, so investing dummies and experienced investors should benefit before any happy investing!