While the definition of a large cap stock varies the simple expiation of a large cap stock is a companies stock being listed in the Standard and Poors 500 index. There are other index funds that is comprised of stocks and other financial securities from other indices like the S&P 500 and NASDAQ. Index investing can be a way to diversify your investment portfolio and be one of the safer investment vehicles in your portfolio management strategy. As well, there are funds like a NASDAQ index fund which tracks companies that are traded on the NASDAQ.
We’ve already mentioned that a Dow Jones index fund invests in the 30 companies that make up the Dow Jones Industrial Average (DJIA). The reason it’s smart to invest along the Dow Jones Industrial Average is because it has risen steadily over time since it’s creation in 1896. It started out as 12 companies, but has grown in encompass 30 blue chip companies. These companies are chosen because there are thought to be large, influential public companies that are indicators and represent how the stock market it doing overall.
These companies are blue chips, which mean they are large and very low risk investments. That is why it is a safe investment to put your money into a Dow Jones Index Fund. It’s passively managed because it follows a preset group of companies and all they have to do is figure out how much they will weigh each stock among the 30. Over time, assuming that all returns are the same, which it unlikely, the index fund will yield you a better return on investment.
The assumption in an actively managed mutual fund is that the money manager has some sort of secret knowledge about companies and stocks that have higher growth potentials. Even still, the process of finding those gem stocks, managing how much stock to buy and sell on a daily basis, and all the other little things a actively managed money manager must do all adds up to much higher management fees than an index fund.
On average, the management fee for an actively managed mutual fund will run you around 1.5%. In contrast, an index fund that follows the Dow Jones Industrial Average may run as low as1%. Some of the best are the Vanguard index funds which have a long and great reputation for offering consistent and positive returns. When they acquired Barclays Global, they also inherited over $1 trillion in passively managed funds like the iShares Index Funds. The S&P 500 , an index that is different from the DJIA in many ways , is a good example of this.