What is an Index?
Stock Market Index
| Index |
Tracks |
| S&P 500 |
500 largest US companies |
| TSX Composite |
200+ largest Canadian companies |
| NASDAQ |
Tech-heavy US stocks |
| MSCI World |
Developed market stocks globally |
An index is like a list that tracks market performance.
What is an Index Fund?
Simple Explanation
| Concept |
Details |
| Goal |
Match index performance |
| Method |
Buy same stocks as index |
| No stock picking |
Automatic holdings |
| Low cost |
No active management |
Example: S&P 500 Index Fund
| Feature |
Details |
| Holds |
Same 500 stocks as S&P 500 |
| Weighting |
Same proportions |
| Return |
Matches S&P 500 (minus small fee) |
| Cost |
~0.03% - 0.10% |
Index Funds vs Actively Managed
The Difference
| Feature |
Index Fund |
Active Fund |
| Goal |
Match market |
Beat market |
| Strategy |
Buy the index |
Manager picks stocks |
| Fees |
0.03% - 0.25% |
1% - 2.5% |
| Performance |
Market return |
Usually worse |
Why Index Usually Wins
| Statistic |
Result |
| 20-year period |
90%+ active funds underperform |
| After fees |
Index returns more |
| Consistency |
Predictable market return |
Index Funds vs ETFs
Key Difference
| Type |
Trades |
| Mutual fund |
Once daily |
| ETF |
All day like stock |
In Canada
| Option |
Common |
| Index mutual funds |
TD e-Series, Tangerine |
| Index ETFs |
Vanguard, iShares, BMO |
| Most popular |
ETFs |
Benefits of Index Funds
Why Choose Them
| Benefit |
Details |
| Diversification |
Own hundreds/thousands of stocks |
| Low cost |
Save 1-2% vs active funds |
| Simple |
One purchase, done |
| Transparent |
Know what you own |
| Tax efficient |
Less trading = less tax |
Cost Savings Over Time
| $100,000 Over 30 Years |
Low Fee (0.2%) |
High Fee (2%) |
| Final value |
~$420,000 |
~$260,000 |
| Lost to fees |
~$10,000 |
~$170,000 |
Types of Index Funds
By Market
| Type |
Tracks |
| Canadian equity |
TSX Composite |
| US equity |
S&P 500 |
| International |
MSCI EAFE |
| Global |
MSCI World |
| Emerging markets |
MSCI Emerging |
| Bond |
Various bond indices |
Popular Canadian Options
| ETF |
Index |
MER |
| VCN |
FTSE Canada |
0.05% |
| VFV |
S&P 500 |
0.09% |
| XEF |
International |
0.22% |
| VAB |
Canadian bonds |
0.09% |
All-in-One Index ETFs
Simplest Option
| ETF |
Allocation |
MER |
| VEQT |
100% stocks globally |
0.24% |
| XEQT |
100% stocks globally |
0.20% |
| VGRO |
80% stocks / 20% bonds |
0.24% |
| XGRO |
80% stocks / 20% bonds |
0.20% |
| VBAL |
60% stocks / 40% bonds |
0.24% |
Inside VEQT
| Region |
Percentage |
| US stocks |
~45% |
| International developed |
~25% |
| Canada stocks |
~20% |
| Emerging markets |
~10% |
| Total holdings |
~13,000+ securities |
One purchase = entire world.
How to Buy Index Funds
Step 1: Open Account
| Option |
Best For |
| Questrade |
DIY investors |
| Wealthsimple Trade |
Beginners |
| Bank brokerage |
Convenience |
Step 2: Choose Your Index Fund
| Approach |
Example |
| One all-in-one |
XEQT or VEQT |
| Build your own |
VCN + VFV + XEF + VAB |
Step 3: Buy
| Step |
Action |
| 1 |
Log into brokerage |
| 2 |
Search ticker (e.g., XEQT) |
| 3 |
Enter amount |
| 4 |
Buy |
| 5 |
Set up recurring |
Index Fund Costs
Management Expense Ratio (MER)
| MER |
Annual Cost on $100,000 |
| 0.05% |
$50 |
| 0.20% |
$200 |
| 2.00% |
$2,000 |
Lowest Cost Options in Canada
| ETF |
MER |
| XIU (TSX 60) |
0.18% |
| VFV (S&P 500) |
0.09% |
| XEF (International) |
0.22% |
| VEQT (Global all-in-one) |
0.24% |
Dollar-Cost Averaging
How to Invest
| Strategy |
Details |
| Regular purchases |
Same amount monthly |
| Automatic |
Set and forget |
| Reduces timing risk |
Buy at various prices |
Example
| Month |
Invest |
Price |
Shares |
| Jan |
$500 |
$25 |
20 |
| Feb |
$500 |
$30 |
16.7 |
| Mar |
$500 |
$22 |
22.7 |
| Total |
$1,500 |
Avg: $25.24 |
59.4 |
Long-Term Returns
| Index |
~Annual Return (Historical) |
| S&P 500 |
~10% (1926-present) |
| TSX Composite |
~9-10% |
| Global stocks |
~8-9% |
Past performance doesn’t guarantee future results.
$500/Month Into Index Fund
| Years |
At 7% Average |
| 10 |
~$86,000 |
| 20 |
~$260,000 |
| 30 |
~$610,000 |
Common Questions
“What if Market Crashes?”
| Historical Crashes |
Recovery |
| 2008 financial crisis |
Recovered by 2013 |
| 2020 COVID crash |
Recovered in months |
| All previous crashes |
Eventually recovered |
Stay invested through volatility.
“Should I Just Buy One Index?”
| Approach |
Pros |
Cons |
| S&P 500 only |
Simple, US exposure |
No diversification |
| Global all-in-one |
Diversified, simple |
Slightly higher fee |
| Build your own |
Customize, lowest fees |
More effort |
“When Should I Sell?”
| Sell When |
Don’t Sell When |
| Need money |
Market drops |
| Rebalancing |
Scary headlines |
| Life change |
Short-term volatility |
Index Investing Strategy
Best Practices
| Practice |
Why |
| Start early |
Time compounds |
| Be consistent |
Regular contributions |
| Keep fees low |
More returns for you |
| Stay diversified |
Don’t bet on one sector |
| Stay invested |
Markets recover |
| Ignore noise |
Long-term focus |
Getting Started
Simple Plan
| Step |
Action |
| 1 |
Open TFSA at brokerage |
| 2 |
Deposit money |
| 3 |
Buy XEQT or VEQT |
| 4 |
Set up automatic investments |
| 5 |
Check quarterly at most |
| 6 |
Keep contributing |