There are many index funds and you can get lost in choosing them. Therefore, it is useful to develop your own approach to filter the wide range of funds. First of all, it should be taken into account that a retail investor in the European Union can generally only buy UCITS-type index funds. UCITS means that the fund is registered and available to investors across Europe. Index funds are created by many investment companies and many of the funds they offer are virtually identical. The largest providers of index funds (ETFs) in the world are Blackrock (iShares), Vanguard and Invesco. Both Vanguard and iShares have so much to choose from that our recommendation is to pick one of these (we pick iShares ourselves) and ditch the others for simplicity's sake. Both of these investment company index funds also have very similar fees.
Once these choices have been narrowed down, one can begin to turn their attention to the investment strategy itself. The idea is simple and at the same time complicated - the investment strategy should be created based on your belief in where the world economy is going in the long term (think 10-30 years). Respectively, which sectors, which regions and countries could develop faster and more successfully than others. However, especially in the beginning, we recommend that you don't go head-to-head in this direction and start building your investment portfolio with two basic index funds: (1) Developed country company stocks, such as iShares MSCI World, and (2) Emerging market stock index, such as iShares MSCI Emerging Markets. Both of these index funds will cover the most valuable companies on the global stock market, including Apple, Microsoft, Tesla, Tencent, Alibaba and many others.
Annual returns of indices over different maturities
Developed countries (USA, Germany, Great Britain, Australia, Japan, etc.) account for about 65% of the world economy (although this proportion is gradually decreasing), as opposed to 35% of developing countries (China, India, Brazil, Mexico, etc.). This could also be a good initial allocation for the proportions of these two index funds in the portfolio.
In order to practically buy index funds, you first need to find on which stock exchange and with which stock symbol these securities are traded. For example, in euro terms, both iShares MSCI World and iShares MSCI Emerging Markets are traded on the Amsterdam Stock Exchange under the symbols IWDA and IEMA, respectively. The exchanges where each index fund is listed are usually found in the product description on the home page (in the case of iShares at the very bottom of the page under "Listings"). Once this step is completed, the relevant symbols are entered into the locator of your stock broker so that the security can be purchased.
When the investment portfolio becomes larger (in our opinion above EUR 100,000), additional funds with an emphasis on a separate geography or industry can be added to these two basic index funds. Here is a series of stock index funds that we find interesting ourselves:
- Management costs (expense ratio). For the most popular and largest funds, these costs should be 0.1% to 0.25% per year. For various more specialized funds, management commissions can be 0.4% to 0.6% per year. There are relatively few index funds whose costs will exceed this amount;
- Liquidity. The larger and, accordingly, the more popular the fund, the more active it is traded on the stock exchange. More exotic and less liquid index funds may have a situation where the difference between the buying and selling price (spreads) on the exchange is disproportionately high;
- Currency . It is easier to buy funds in the same currency as your savings. This saves, for example, commissions for currency conversion;
- Dividends. Index funds either pay dividends received (distributing) or return investment (accumulating). Almost every index fund has the ability to choose between these fund sub-types. We basically choose index funds with the accumulating principle, so that we don't have to think about reinvesting dividends.
In summary, in our opinion, index funds are a simple and affordable way for any investor to start accumulating stocks. Investing can be started gradually by investing in one or two index funds. On the other hand, by gradually getting to know the world of index funds in more detail, you can supplement your investments with already more nuanced and specialized funds.