Index mutual funds are investment vehicles comprising stocks from a wide variety of companies and track the performance of a specific index, such as the Dow Jones Industrial Average. Investors are able to spread their assets across many different investments with the convenience of one fund, which can help protect them from market volatility. Index funds also tend to be relatively inexpensive, with annual costs ranging from 0.03% to 0.40% of assets compared to actively managed funds, which can have annual costs of 0.85% or higher.¹

The first index fund was founded in 1975 by The Vanguard Group. Today it is known as the Vanguard 500 Index Fund, but there are many others on the market now. In fact, their prevalence has prompted some cause for concern. In a 2018 Wall Street Journal editorial, Vanguard founder John Bogle sounded the alarm that today’s index fund investments are largely managed by three firms — Vanguard, State Street and Black Rock. His concern was that these money managers are now the majority shareholders for more than 80 of the largest companies in the United States. ² That’s a lot of concentrated power and influence.

There are currently about 5,000 U.S. indexes. The most commonly known are the S&P 500, the Dow Jones Industrial Average and the Nasdaq Composite Index. Monitoring various buckets of investments that represent different asset categories and/or sectors is a critical measure for market analysts, as they provide keen insights into the economy and investment trends.³

Indexing may be an appropriate strategy for risk-averse, long-haul wealth accumulation, as well as a strong component in a retirement portfolio. Index funds can offer a way to consolidate aggressive investments into a diversified vehicle offering growth potential to help offset long-term inflation. In fact, annuities that credit interest based on the performance of a specific index may give retirees the ability to combine growth opportunity with guaranteed income (guaranteed by the insurer). If you’d like to learn more, just give us a call.

There are other aspects to the indexing strategy that have come into play in recent months. In August, for example, President Trump pitched the idea of reducing the capital gains tax by indexing it to the rate of inflation. This would lower tax bills for investors.⁴

However, despite the administration’s claims, the nonpartisan Tax Foundation asserted that indexing capital gains taxes would have very little effect in stimulating economic growth. Furthermore, the tax cut would benefit only the top 1 percent of taxpayers and was projected to reduce federal tax revenues by nearly $178 billion over the next 10 years.⁵ Trump has since backed off the proposal.⁶

In related news, JPMorgan has introduced a new index called the “Volfefe Index.” The Volfefe is designed to monitor how President Trump’s messages on Twitter affect Treasury market yields. Volfefe was named after one of Trump’s 2017 tweets featuring the undefined word “covfefe.” Given that one in ten of the president’s tweets relate to U.S. investment markets, JPMorgan’s index tracks the rolling one month probability that each message initiates market-moving volatility (based on the status of Treasury yields five minutes following a Trump tweet). The Volfefe Index indicates that a wide range of stocks have been impacted by Trump tweets, especially in recent weeks.⁷

Content prepared by Kara Stefan Communications.

¹ Daniel Kern. ThinkAdvisor. July 3, 2017. “How ETFs and Indexing Took Over Active Management.” https://www.thinkadvisor.com/2017/07/03/how-etfs-and-indexing-took-over-active-management/. Accessed Sept. 9, 2019.

² Meghna Chakrabarti. WBUR. Dec. 12, 2018. “Stock Market Distress Signal: How Low-Cost Index Funds Are Taking Over.” https://www.wbur.org/onpoint/2018/12/12/stock-market-index-funds-john-bogle. Accessed Sept. 9, 2019.

³ Caroline Banton. Investopedia. June 25, 2019. “An Introduction to U.S. Stock Market Indexes.” https://www.investopedia.com/insights/introduction-to-stock-market-indices/. Accessed Sept. 9, 2019.

⁴ Caitlin Oprysko and Arren Kimbel-Sannit. Politico. Aug. 30, 2019. “Trump again flirts with easing capital gains taxes.” www.politico.com/story/2019/08/30/trump-capital-gains-taxes-1478882. Accessed Sept. 26, 2019.

⁵ Daren Fonda. Barron’s. Aug. 3, 2019. “Indexing Capital Gains to Inflation Would Be Great for the Rich. There’s No Economic Rationale.” https://www.barrons.com/articles/indexing-capital-gains-to-inflation-makes-no-economic-sense-51564833600. Accessed Sept. 9, 2019.

⁶ Jacob Pramuk. CNBC. Sept. 11, 2019. “Trump rules out for now cutting capital-gains taxes.” www.cnbc.com/2019/09/11/trump-white-house-mulls-indexing-capital-gains-to-inflation-tax-plan.html.

Accessed Sept. 26, 2019.

⁷ Tracy Alloway. Bloomberg. Sept. 8, 2019. “JPMorgan Creates ‘Volfefe’ Index to Track Trump Tweet Impact.” https://www.bloomberg.com/news/articles/2019-09-09/jpmorgan-creates-volfefe-index-to-track-trump-tweet-impact. Accessed Sept. 9, 2019.

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand  a variety of financial vehicles and should not be construed as financial advice. Investing involves risk, including the potential loss of principal. Any references to protection and lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company.

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

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