How to invest in index funds
Looking to invest in index funds? Read on to find out how it works, see an example, and discover some of the key benefits and risks of index fund investing.
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Visit help and support for more information.
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Contact us 0800 409 6789
Call 0800 195 3100 or email newaccounts.uk@ig.com to talk about opening an account.
Contact us 08001953100
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Get info fast via our instant help and support portal. Available for account queries, ProRealTime, product info and more.
Visit help and support for more information.
Call 0800 409 6789 or email helpdesk.uk@ig.com if you have any questions about trading or investing. We're available 24/7 between 8am Saturday and 10pm Friday.
Contact us 0800 409 6789
What are index funds?
Index funds are investments like mutual funds and exchange traded funds (ETFs) that passively track the performance of a benchmark index or indices with the aim to mirror performance. For example, if you invest in an ETF that tracks the
S&P 500, you have exposure to the performance of all the companies that make up the index.
There are four main types of funds in the UK. They differ based on whether they’re listed on a stock exchange (on-exchange) or bought and sold from the fund itself (off-exchange), and whether they try to track the market passively or actively.
On-exchange funds are listed on a regulated stock exchange. This can offer more visibility of other orders on the market, which means more transparency. You can see the price at any time and buy into the fund or exit it quickly, as trades are near instant in liquid markets.
Off-exchange funds don’t trade on a regulated stock exchange – instead, they’re bought and sold over the counter (OTC) from the fund itself. These funds issue and redeem shares directly to and from investors, which often means less liquidity.
The four main fund types are:
- On-exchange, passively managed funds like ETFs and exchange traded commodities (ETCs)
- On-exchange, actively managed funds like traditional investment trusts, real estate investment trust (REITs) and closed-end mutual funds
- Off-exchange, passively managed funds like index tracker funds
- Off-exchange, actively managed funds like unit trusts and open-end mutual funds
How to invest in index funds
You can invest in index funds via a wide range of ETFs, REITs, ETCs and investment trusts if you have an account with us. Here are steps on how to buy index funds in the UK:
- Learn more about index funds
- Identify the index you want to track
- Pick the fund you want to buy
- Open an investment account
- Buy shares in the index fund
1. Learn more about index funds
Index funds are one of the most popular ways to get access to a diversified set of assets in one position. Diversification is known for being lower risk, as all your ‘eggs’ aren’t in one ‘basket’. You can diversify across more than just asset classes – you can also invest across an array of geographies, industries and company sizes.
Not only do index funds offer broad exposure, but they’re also considered a lower-cost alternative to investing in several stocks, bonds, etc individually. Note that all investments carry risk, and past performance doesn’t guarantee future results.
2. Identify the index you want to track
Once you’ve decided that you’d like to invest in index funds, it’s time to identify the type of index you’re interested in. Below are some examples of funds and what they track.
| Index fund | What it tracks |
|---|---|
| Stock or equity index funds | Stock indices like the S&P 500 |
| Bond index funds | Bond indices like the US Treasury Index |
| Balanced index funds | Both stock and bond indices |
| Market cap index funds | Market-capitalisation weighted indices like the FTSE 100 |
| Equal weight index funds | Indices where all assets carry the same weight, ie the same amount of money is invested in each company (eg the S&P 500 Equal Weight Index) |
| International index funds | Composition of companies included in indices from around the world, like the Nasdaq, Hang Seng, NYSE, and emerging markets indices |
| Sector-based index funds | Indices that cover the same industry, eg tech stocks |
You don’t have to invest in a single type of index fund; you can diversify even further. For example, allocating 50% of your investment to bond index funds, and 50% to international index funds.
3. Pick the fund you want to buy
Whichever type of index fund you prefer, we have thousands of markets to choose from, including ETFs, REITs, ETCs and investment trusts.
Exchange traded funds (ETFs)
ETFs track the performance of an underlying asset or group of assets. We have an ETF screener, where you can choose the ETF that’s right for you. Use our screener to filter more than 2000 global ETFs by asset class, country, performance, and more.
You can decide between some of the world’s biggest providers, including:
- iShares – the leading ETF provider, with more than $2 trillion in assets under management
- Vanguard – offers a variety of ETFs, covering US and international stock and bond markets, as well as
industry-specific sectors - Invesco – offers a wide range of specialist ETFs, covering commodities, forex, fixed income, and equities
Real estate investment trusts (REITs)
REITs work in the same way as mutual funds, with several private investors contributing their own capital to create a single pool of funds. These funds are used to build a portfolio of properties, and the income is almost wholly distributed among its shareholders on a regular basis. We offer more than 40 REITs to choose from, including Nexus and Cromwell.
Exchange traded commodities (ETCs)
ETCs are bought and sold on-exchange; they give you exposure to a basket of commodities in a single position. Commodities are material assets like oil, gas, livestock and wheat. Because ETCs track the underlying price of the commodity, their price will be affected by anything that moves the price of the commodity itself.
Investment trusts
An investment trust is a pool of investor funds used to buy financial assets. If you invest in such a fund, your capital is your own, but you don’t make the investment decisions yourself – the fund manager does. Our trusts give you access to a wide range of markets and are managed by some of the UK’s best fund managers, such as BlackRock and Aberdeen.
4. Open an investment account
Investing in index funds in the UK requires an investment account. You can apply to open an account with us, choosing between a share dealing account and a Smart Portfolio.
- Share dealing – invest in ETFs or investment trusts
- Smart Portfolio – let experts manage your specially tailored ETF investments
5. Buy shares in the index fund
When you have an open share dealing account and you’ve decided on the fund you want to invest in, follow these steps:
- Log in to your account
- Search for the fund you’re looking for, eg UCITS FTSE 100
- Select your position size
- Click on ‘buy’ in the deal ticket
For Smart Portfolios, our experts will tailor-make your investment portfolio. All you need to do is answer a few questions to help us determine the best portfolio for you.
Examples of index funds
We have a wide variety of index funds to choose from, including more than 2000 ETFs as well as a big selection of REITs, ETCs and investment trusts. Some examples are:
Advantages and disadvantages of index fund investing
| Pros of index fund investing | Cons of index fund investing |
|---|---|
| Easy to maintain a diversified portfolio, lowering your investment risk | No control over fund composition |
| Offer choice in many different types of funds | An index fund’s price action follows the performance of a market or sector, including potential bear markets and economic downturns |
| Fees are generally lower due to it being a passive investment | Cannot beat the market, as index funds are designed to only match market performance |
| Tax efficient (generate less taxable income)1 | Potential for returns is typically lower in the short term |
Index funds summed up
- Index funds are investments like ETFs, REITs and ETCs that passively track the performance of a benchmark index or indices, enabling access to a diversified set of assets in one position
- There are four main types of funds:
- On-exchange, passively managed funds
- On-exchange, actively managed funds
- Off-exchange, passively managed funds
- Off-exchange, actively managed funds
- Investing in index funds in the UK requires an investment account. You can apply to open an account with us, choosing between a share dealing account and a Smart Portfolio
- Some benefits of investing in index funds are diversification, lower fees, and tax efficiency1
- Disadvantages of investing in index funds include no control over fund composition, not outperforming the market, and lower return potential
FAQs
Are index funds best for beginners?
Index funds are for any type of investor. They may appeal to beginners, since they generally require less input than other investment options (investors don’t need to research and choose individual shares, for instance). They’re also considered low risk and tax efficient.1
How do you buy an index fund in the UK?
To buy (invest in) an index fund in the UK, you need an investment account. With us, you can choose between a share dealing account and a Smart Portfolio. This will give you access to a wide selection of ETFs, REITs, ETCs and investment trusts.
How much money do you need for an index fund?
How much money you need will depend on the price of the fund you’re looking to invest in. Some funds have a minimum initial investment amount. You’ll also need to make provision for certain fees and charges. With us, you can invest in ETFs from as little as £3 commission.2 For Smart Portfolios, our fees start from just 0.5% and are capped at £250 per year, per account type.
Get detailed information on how to start investing
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Learn how to manage your trading and investing risk
1 |
Tax laws are subject to change and depend on individual circumstances. Tax law may differ in a jurisdiction other than the UK. |
2 |
Place three or more trades on UK shares in the previous month to qualify for a £3 commission rate. Please note published rates are valid up to £25,000 notional value. See our full list of share dealing charges and fees. |
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