Iowa Insurance Division Iowa State University Extension Investor Protection Trust


Index funds may be for you

Radio Transcript, 2 minutes 15 seconds, for use during week of Dec. 3.

Description: Penny, Susan and Ira discuss index funds.

Announcer: Invest Wisely comes to you from Iowa State University Extension through a grant from the Investor Protection Trust, providing investor education on the web at:

Ira: Penny, we’ve talked about mutual funds and I understand that they are a great choice for many individual investors.

Penny: Yes, mutual funds can be a great way to diversify your portfolio and give you access to the expertise of professional managers.

Susan:  Penny, recently I read that although managed mutual funds may do well in any one year, most do not consistently beat the market. 

Penny: That’s correct, Susan.  And that’s exactly the reason that many individuals prefer to invest in index funds.

Ira: Can you explain what an index fund is and how it differs from a managed mutual fund?

Penny: Index funds don’t attempt to pick and choose individual stocks or try to time the market.  An index fund tracks a particular group of stocks.

Susan: Can you give us an example?

Penny: Sure.  There’s the S&P 500 index, which is comprised of stocks of large companies, the Russell 2000 index, comprised of small company stocks and the Wilshire 5000 Total Market index, to name a few.

Ira: And an index fund would basically see the same returns as posted by the index it tracks?

Penny: Yes, minus the annual fees required to run the fund.  Generally these will be low because there’s no need for analysts to decide when to buy and sell securities.

Susan: What are the tax liabilities with an index fund?  Are they similar to managed mutual funds?

Penny: Index funds are usually quite tax efficient.  Although you will be liable for capital gains when you sell, the fund’s manager does not buy and sell frequently so typically taxable distributions only include dividends.

Ira: This is great information, Penny.  Index funds sound like a good option to include in my investment portfolio.

Penny: You’re welcome.  And remember, for more information visit the ISU Extension website at and look for ‘Invest Wisely.’


Updated December 3, 2007