Although you can't invest directly in an index, several investment products provide returns to match the changes in the index you select. The time frame on these index-tracking products will be open-ended. Your return depends on how long you stay with the investment, and on what happens to the index during that time. Investing in an index does not guarantee a return in a specific period.
To "invest" in an index you can buy shares in an index mutual fund, or shares of an exchange-traded fund, or futures contracts that track the index value. A mutual fund investment can be made directly with a fund company. ETF shares are purchased through a brokerage account. To trade index futures, you must open an account with a commodity futures broker. When you invest in an index-tracking investment you might never get a profit, or you could make one in a few seconds, or you could hold an index investment for years and let the value build.
Index Investing Long-Term
You can invest to track an index as part of a long-term investment strategy. Index funds allow you to track market returns at very low expense, especially compared to actively managed funds. Either an index mutual fund or an ETF would work as a long-term investment. Mutual funds let you automatically reinvest any dividends the fund pays. Distributions from an ETF will be deposited into the cash balance of your brokerage account. A longer-term investment in this case might range from a few months to many years.
You can short-term trade -- rapidly buy and sell -- to profit from swings in an index. The leverage provided by index futures or leveraged ETFs allows you to earn a multiple of the change in the underlying index. For example, with a three-times leverage ETF, you would earn 15 percent if the tracked index went up 5 percent. Futures and inverse ETFs allow you to profit from declines in an index. Short-term trading periods can range from a few minutes to a few weeks. The use of leverage with this type of trading puts you at risk of significant losses as well as offering potential for larger profits.
Types of Indexes
Index investing involves selecting which index to follow as well as what type of investment product to use. The major stock indexes include the Standard & Poor's 500 index, the Dow Jones industrial average and the Nasdaq Composite index. More-focused stock indexes have corresponding investment products. These indexes often track the stocks of a sector such as energy or technology. There also are funds and ETFs that track bond indexes.
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