Indexings Important Cost Advantage

An index fund (also known as a passively managed fund) seeks to match the investment performance of a specific stock or bond benchmark index. Instead of actively trading securities in an effort to beat the market, an index fund manager simply holds all-or a representative sample-of the securities in the index. In contrast, an active fund manager buys and sells securities regularly in pursuit of maximum gain.

The indexing strategy minimizes fund costs, which can take a hefty bite out of your investment returns and significantly reduce the growth of your assets over time.

Index funds have:

• Low Operating Expenses. An index fund incurs minimal advisory fees, distribution charges, and other expenses.
  
• Low Transaction Costs. An index fund does little trading; in contrast, an actively managed fund's brokerage and other trading costs may reach 1% of assets annually.

Traditional unit trust managers have high portfolio activity; the average fund's portfolio turnover rate is 92% per year. (Lipper Inc.) The trading costs of this portfolio turnover may be expected to subtract an additional 0.5% to 1% annually from performance.

Tax Advantage of Index Investing
The relatively low trading activity in index funds gives them a tax advantage over comparable actively managed funds.

Since index funds engage in much lower portfolio turnover than actively managed funds, there is a strong tendency for index funds to distribute only modest-if any-capital gains to unit holders.

Low portfolio turnover means fewer capital gains distributions and a smaller tax bite for investors.