With all the attention that indexes receive, you can understand why some people think that an index might be an ideal investment. But you can’t invest in an index. It’s a statistical calculation, not a security. And it’s not for sale. But there are some alternatives.
You
can invest in an
index
fund
that owns all of the
securities
included in a particular index, or a representative sample of
those securities. There are dozens of funds for most of the major
indexes, and a number of funds for some of the smallest or most
specialized indexes. In general, your results are similar to the
results of the underlying index, though index funds linked to
the same index tend to provide slightly different returns.
You can invest in an
exchange traded fund (ETF)
that owns the stocks in a particular index,
trading that ETF as you would a stock. The appeal is that you
can participate in the movement of a great many more stocks than
you could buy on your own, generally for less money than owning
a mutual fund.
You can buy
stock
index options
to hedge a stock portfolio. And you
can also buy stocks that are about to be added to an index, in
the expectation that the price will go up when index fund managers
are required to buy the stock to ensure that their fund is in
line with the new composition of the index.
One of the ways that investing in index mutual funds differs from investing in ETFs is that index funds can be bought or sold only at the day’s closing price. In contrast, ETFs can be bought or sold throughout the trading day at the price that’s current at the time of the trade, just as stocks can.
You
can invest in an
