No Load Index Funds
One of the ways financial advisors make money is by making recommendations to customers about
certain funds, and then receiving a commission from the fund issuer if the customer decides to
go ahead and buy into the fund. The argument is that the financial advisor has done all the
legwork researching the various funds and has spent the time teaching the customer about
the ins and outs. The customer should understand that a portion of his or her invested
money, perhaps greater than 1%, goes into the commission. Therefore should a customer invest
$10,000 in one of these funds, he or she might pay $100 or more in commission. Such commission-driven
funds are known as "load" funds.
A Load is a Fee
On the flip side, there are funds that are not sold through financial advisors and therefore
do not incur a fee when purchasing them. These funds may be issued directly by a company that
takes on their own customers. This is possible if the company is very large, very well-known,
and can depend on a steady stream of customers willing to buy in. A fund that does not have
commission fees is known as a no load index fund.
Should You Pay a Fee For Financial Guidance?
Is one fund better than the other? Many people like to talk to a financial advisor to learn about
these funds firsthand from someone. These people are willing to pay a small fee for this service.
This is the human-side of the equation: some investors prefer to have a human face when selecting
an investment vehicle. But is this it? Do load funds perform any better than no load funds? Is
there anything more to the commission than the human face? The research seems to indicate "no".
The load funds seem to perform just as well as no load index funds. Therefore, for the value-conscious
investor, the right course of action may be to avoid the broker, commissions, loads and head
straight for a no load fund.
The Most Popular No Load Index Fund
The most popular of no load index funds are the SP500 index funds. The SP500 is a list of
500 companies that have fulfilled several criteria for their size, industry significance,
sales, capitlization etc. The list is continuously being renewed, with tottering companies
being eliminated and growing companies added. The original list came from the ratings agency
Standard and Poors, but has been adopted in spirit by many investment institutions. Go to Schwab,
Fidelity, T. Rowe Price or Vanguard, and one can find that each has several no load index funds that cover
all or most of the SP500 members.
Other Index Funds
The list of 500 is not the end of the story though. There are a number of other no load index
funds such as the list of 400, list of 600, and list of 2000. Each list is comprised of a
number of companies fulfilling some criteria in size, capitilzation etc.