Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
If you’re looking to invest, you may have heard about index funds from financial experts, or even the esteemed Warren Buffet. There’s a good reason they’re so well-regarded. An index fund is typically a low-cost, low-risk investment portfolio of shares and other assets that tracks a financial market index.
But how do they work and what makes them different to other kinds of funds? This guide cuts through the financial jargon to cover everything you need to know about index funds in New Zealand and why they’re creating so much buzz.
If you already understand what index funds are and want to start investing, you can do so through a fund manager, a full service broker or an online share trading platform. One of the easiest and cheapest ways to access index funds is via exchange traded funds (ETFs) which are traded on an exchange such as the New Zealand Stock Exchange (NZX), the New York Stock Exchange (NYSE) and so on.
Before you do so, you should know that not all ETFs are index funds and some funds are riskier than others – you can read more about this below.
You also have the option of investing in an Index CFDs. A CFD is a contract between a buyer and a seller, where one agrees to pay the other the price difference between the opening and closing price of the contract.
A typical managed investment fund is a portfolio of stocks and other assets. Instead of buying shares in one company, you can invest in a bundle of them. To deliver profits for their clients, fund managers buy and sell assets within the fund by trying to predict market movements. This difficult feat is known as “active” management.
An index fund is handled a little differently. It’s simply a pool of company stocks that mimics a financial index, requiring little intervention from its fund managers.
To understand an index fund, it’s important to know what an index is. A market index is normally a collection of stocks that are listed on a stock exchange. New Zealand’s most well-known index is the NZX 50, which consists of New Zealand’s largest 50 companies by market capitalisation. The Wall Street alternative is the S&P 500 index, which includes the top 500 listed companies in the US.
You’ll notice these indices are frequently cited in the media because investors use them to track the overall performance of a market. They rise and fall depending on a range of economic indicators and company news. For example, when an economy is healthy, its stock market indices tend to rise because investors feel more confident buying stocks. If trade tensions increase between countries, stock market indices usually fall as investors become nervous.
Index funds hold a selection of stocks that make up an index. If a company leaves an index, the fund manager simply sells its shares and replaces it with new stocks. For this reason, index funds are considered a comparatively safe, albeit less exciting, alternative to directly buying shares in a company. Because these kinds of funds require minimal management, it’s known as “passive” investing.
It’s important to note that while index funds are sometimes ‘mutual funds’ overseas, within New Zealand, the term “index fund” more often refers to exchange-traded funds (ETFs).
Confused about the terminology? You’re not alone. These terms are changing all the time and vary across different borders. Despite the popularity of traditional managed (sometimes called mutual) index funds in the US and other countries, there are fewer such options available in New Zealand. Instead, many New Zealand investors use ETFs to track indices as they work in much the same way but are broadly easier to access and have a lower minimum cost requirement.
Most ETFs are similar to traditional index funds in that they are low-cost and track a major underlying index, though there are a few key differences:
Simply put, index funds have been proven to outperform many other kinds of investments.
In 2007, one of the world’s most successful investors, Warren Buffet, made a $1 million bet that a bundle of active managed funds would be worse off than the S&P 500 over 10 years. He argued that if a fund simply mimicked a major index, it would deliver better returns than a fund actively managed by professionals. A decade later, Buffet won that bet.
The point is that, although major indices fluctuate from year to year, they usually rise over a long period of time. For example, the NZX 50 index fell by more than 4.7% during the 2008 global financial crisis. But even if you had invested in the index fund just prior to that, you’d still be in a better financial position today than if you’d not invested at all.
Of course, no investment is ever 100% “safe” and you should always seek professional advice before making any investment decision. Here are some of the risks that investors need to be aware of:
| NAME | INDEX |
|---|---|
| Vanguard International Shares Select Exclusions Index Fund | MSCI World ex Australia, ex Tobacco, ex Controversial Weapons, ex Nuclear Weapons |
| NZ Top 50 ETF | S&P/NZX 50 |
| US 500 ETF | S&P 500 Index |
| Smartshares S&P/ASX 200 ETF | S&P/ASX 200 |
Most major fund managers offer access to a limited pool of index funds, though ETFs are the more readily accessible option within New Zealand.
Traditional index funds can be purchased directly through their associated fund providers, ETFs can be purchased with any regular stockbroking account.
Whether you want to invest in an ETF or an unlisted index fund, these are the steps you need to follow:
Ask yourself what you want to achieve through this investment. Consider your time frame and how much risk you’re willing to take on. Will you need to withdraw the funds in a year’s time or can they sit for 10 years?
Compare funds online to find a product that matches your goals. Consider the risks, the fund’s performance, the brokerage fees and other transaction costs.
Key things to take into account when deciding on an index fund:
Once you’ve found the right product, you’ll need to work out the best way to access it.
Index funds can be accessed through their fund providers:
ETFs are accessible on most online trading platforms and can be purchased just like any other stock. You’ll need to sign up for an online share trading platform. To do this, you’ll need to:
For more information about ETFs make sure to check out our extensive guide.
If you want to invest in ARK Invest ETFs, we’ll show you how in this simple guide.
Popular trading app Sharesies now lets Kiwis invest as little as 1 cent in ASX-listed shares and ETFs.
What to consider before you invest in biotechnology companies.
You might think that AI is just something you’ve seen in sci-fi movies, but it’s slowly working its way into our day to day lives. Find out how you can invest in it.
Here’s everything we know so far about the Robinhood IPO.
Step-by-step instructions to help you invest in Briscoe Group shares on New Zealand’s Exchange.
Your simple, step-by-step guide on how to buy TLT shares on the NZX.
Your easy-to-understand guide to buying Pacific Edge shares on the NZX.
Your simple, step-by-step guide to investing in Mercury shares on New Zealand’s Exchange.
Step-by-step instructions on how to buy Comvita shares on the NZX.
