1.    Low costs

Costs matter. With index funds, you’ll generally pay low fees and keep more of your money.

Index funds have low fees because they don’t pay fund managers for their research time and expertise, trying to beat a benchmark. An index fund like the Total Stock Market Index Fund buys all (or a representative sample) of the securities in the benchmark index. The fund holds these securities until the investments in the index change, keeping management costs low.

2.    Broad diversification

A diversified portfolio is an important part of a successful investment plan. That’s especially true when you’re investing for a short-term goal like college tuition.

Index funds hold most or all of the securities in their target indexes, which means certain index funds can expose you to thousands of securities in a single fund. Actively managed funds typically hold fewer securities the fund manager forecasts to outperform their index.

Diversification can’t protect against broad market declines, but it can reduce the risk of a sharp price drop in any one security.

3.    Greater relative predictability

There’s no guarantee your investments will perform the way you expect. However, index funds tend to follow their benchmarks more closely than actively managed funds.

Here’s why: When fund managers attempt to outperform an index, they risk underperforming an index. Index funds don’t try to outperform the index, rather to match it, which makes them more likely to follow a linear path than up-and-down swings.

Index funds provide relative performance predictability
Range of excess return

Range of excess returns
Notes: Shaded regions depict the range of returns between the 75th and 25th percentiles for U.S. equity active and index strategies. Returns are defined as rolling 12-month excess returns relative to a prospectus benchmark on a monthly basis. The sample of U.S. equity funds is defined by Morningstar U.S. category.
Source: Vanguard calcuations, using data from Morningstar, Inc.

 

Investing in index funds in your 529 plan

Most plans offer age-based options comprised of underlying investments that are index funds. Age-based options are all-in-one portfolios that help you invest for college with a specific target date. The portfolio shifts from riskier investments to more conservative investments as your child gets older and closer to the first year of college.

Or you can build your own portfolio and invest in index funds as a part of it.

Setting the record straight: Truths about indexing

Notes:

All investing is subject to risk, including the possible loss of the money you invest.

Diversification does not ensure a profit or protect against a loss.

Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.