How I Break Down Index Funds for My Portfolio

In this episode of the Personal Finance Podcast, we're going to talk about  how I analyze index funds to choose my investments. How Andrew Can Help You: Listen to The Business Show here. Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining Index Fund Pro! This is Andrew’s course teaching you how to invest! Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok. Learn how to get out of Debt by joining our Free Course Leave Feedback or Episode Requests here. Car buying Calculator here Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at shopify.com/pfp Chime: Start your credit journey with Chime. Sign-up takes only two minutes and doesn’t affect your credit score. Get started at chime.com/ Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Go to joindeleteme.com/pfp20 for 20% off! Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Turn your business dream into reality! Apply now at www.oneday.org/pfp Go to Acorns.com/pfp and start automating your investments and get a $5 bonus today! Delete Me: Use Promo Code PFP for 20% off! Relevant Episode: How to Build a Forever Portfolio With Rob Berger Should You Rebalance Your Portfolio (The Answer May Surprise You!) The Complete Breakdown of The 2-Fund Portfolio (The Warren Buffett Portfolio) Connect With Andrew on Social Media: Instagram TikTok Twitter Master Money Website Master Money Youtube Channel Free Guides: The Stairway to Wealth: The Order of Operations for your Money How to Negotiate Your Salary The 75 Day Money Challenge Get out Of Debt Fast Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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• 0:00Andrew Giancola?

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• 0:44Andrew Giancola?

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• 2:24Andrew Giancola?

  What's up everybody and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of MasterMoney.co. And today on the Personal Finance Podcast, we're going to be talking about how I analyze index funds. If you guys have any questions, make sure you join the Master Money newsletter by going to MasterMoney.co/newsletter. And don't forget to follow us on Spotify, Apple Podcasts, YouTube, or whatever your favorite podcast player is. And if you want to help out the show, consider leaving a five-star rating and review on Apple Podcasts, Spotify, or your favorite podcast player. Now today,

• 3:04Andrew Giancola?

  I'm going to dive into how I analyze index funds. And I go through a very specific process when I am looking at a new fund that I may want to invest in. And so today, we're going to go through the nine different steps that I go through to try to factor in what are the big things that I want to know. And so I want to make this as easy as possible for you as well. And so we're going to go through some of these metrics that you may think that you already go through, and some of these you may not go through yet. And it's going to be a great lesson for you in order to learn how to analyze index funds. So I have a ton of stuff to go through here in this episode. So without further ado, let's get into it. All right. So to start off this episode, we are going to get as basic as

• 3:48Andrew Giancola?

  we possibly can for those who are brand new to index fund investing. And so if you are brand new to index fund investing, there is something that you need to search for when you are looking for this specific investment called a ticker symbol. Now, a ticker symbol is just going to be a bunch of various letters that identifies that specific fund. And so when we are looking at index funds and ETFs, you may be looking for an S and P 500 index fund, for example, and Vanguard has a bunch of them. Well, Vanguard's ticker symbol is V F I A X. Now, I'm going to use V F I A X as an example throughout this entire episode. So you'll see me talking about V F I A X throughout. This episode. So if you're listening at home and you want to pull up and kind of look at what I'm looking at,

• 4:31Andrew Giancola?

  you can go to Vanguard's website and pull up V F I A X. Just a simple way to have an example here. But the ticker symbol, all it is, it's just the fund name essentially broken down. And so you need to understand what that ticker symbol is as you start to look through some of these investments. So say, for example, you look up a list of S and P 500 index funds. Well, you'll see all these different fund names. And then in addition, you'll see these ticker symbols listed up and down on that fund. Next, we want to look at inception date. Now, these are just some of the other fun basics that I want to know. But inception date means when was this fund started? When did this begin? Because the longer the history, the better for me. I like older funds.

• 5:13Andrew Giancola?

  I like funds that have a long-term history because I can see how they performed throughout different economic cycles. We have had a ton of different things happen over the course of the last 50 years. And if I can find funds to have been through, for example, the tech bubble in the late 90s and early 2000s. Well, that's a great indicator of what would happen based on something really surging way too high in how that fund performs. But even more importantly is what I really want to know is are there funds that were available back during the 2007, 2008 recession? Why? Because I want to see the worst case scenario. What would happen to this fund in the worst case scenario? And so I look that far back to see if these funds have that history.

• 5:58Andrew Giancola?

  Now, if there's a newer fund, there's nothing wrong with that. You can still invest in newer funds. But I like older funds because I can look back historically and see what happened. 2007 and 2008 is a really important time for me because that is when the Great Recession happened, the stock market collapsed, and most of these investments dropped 50%. And I want to see exactly how that happened and when it happened on some of these charts. Now, does charting some of this stuff truly, truly matter? Not always. It doesn't always matter when you're looking at this, but I want to see that inception date so I can understand what happened in the past. In addition, I also want to see how a fund performed.

• 6:36Andrew Giancola?

  Over the course of 2009 through 2015, I want to see how it recovered from 2008 and 2009 and what happened during that big economic surge all the way up until 2020. Because when you look at 2020, what happened in 2020? COVID-19, where we had some pullbacks in 2020. Did it weather that storm? Was it resistant against some of these pullbacks? Or was it something that had a much larger impact? If it had a much larger impact, it may be too heavily weighted in certain assets. We'll talk more about that as time goes on here. So that's the first thing is I'm just looking at those two fun basics. Hey, what is the ticker symbol? We're talking about that just for people who are brand new to index fund investing. And then secondly, the inception date.

• 7:19Andrew Giancola?

  Okay, so now we're going to dive into some deeper dive stuff here. Now, if you are brand new to index fund investing, we have a course called Index Fund Pro. And Index Fund Pro is the Investing for Beginners course that is going to teach you step by step all of this stuff. But we're also going to dive deeper into this. So if you're interested in Index Fund Pro, you can go to mastermoney.co/courses and check out Index Fund Pro. Let's go to the second step, which is fees and efficiency. All right, next, we are going to be looking at fees and efficiency. And what we want to really be looking at first is the expense ratio. Now, the expense ratio is going to be the percentage of assets deducted annually for fund management. What does that mean? What is that jargon even talking about?

• 8:03Andrew Giancola?

  What this means is how much you're paying out of your pocket to the fund manager in order to manage this fund. These are the fees that are coming out of your pocket. And we want to keep this as low as possible, especially when we are investing in funds. If you are getting nothing out of this fund outside of just being invested in this fund, you do not want to be paying a high expense ratio. You want to keep those fees as low as possible. In fact, the lower, the better. Now, there are a lot of fantastic index funds out there now that have 0% expense ratios. So if you're out there and you have a financial advisor who is putting you in a really high fee mutual fund or a really high fee expense ratio, you want to make sure that you have a conversation about that. Because there

• 8:46Andrew Giancola?

  A lot of low fee expense ratios out there. For example, Fidelity has zero fee expense ratio index funds. They're absolutely amazing. I invest in some of them and they are something that I think a lot of people can look into where you pay 0% fee. Now, what is a good expense ratio? That's going to be the big question a lot of people ask. And really, a very good expense ratio is anything below 0.10% or 10 basis points is what a lot of people will call that. So anything below 10 basis points or 0.10% is a very, very good expense ratio. Acceptable is anything between 0.10 and 0.30. Because in that range, most likely, some of those funds are at least low enough.

• 9:30Andrew Giancola?

  And you'll see how impactful this is in a second. I'm gonna do the math for you. But you're gonna see that that's low enough to see a not as big of a difference as some of these other expense ratios will be. Now, as we get above 0.40 and 0.50% expense ratio, those fees are gonna really impact your portfolio. Unless you're getting help from someone. If someone is helping you with your money, you should not be paying that high of an expense ratio for a fund. So if you're investing in index funds and all you're doing is buying an index and you have that high expense ratio, then that is gonna be something you really want to avoid. That's what advisors should be charging you. That shouldn't be something where you are paying that much in an expense ratio and having to worry about paying all these costs upfront.

• 10:13Andrew Giancola?

  Now, here's one thing I want you to note when it comes to expense ratios. You want to get them as low as possible. But sometimes, in things like your 401k, you only have so many options. It is so much better to get your money at least invested than it is to not invest at all because of the expense ratio. So if you are looking in your 401k and all of the options are just terrible and the lowest expense ratio you can find is some sort of S&P 500 index fund that has a 0.50% expense ratio, then you know, more power to you. At least you have something to invest in, especially if you're getting a 401k match. But when it comes to your own investments where you can go out and choose your investments, you need to keep them at least below 0.30% when it comes to the

• 10:56Andrew Giancola?

  Funds themselves if you can. That's the goal is if you can. Now, sometimes you have no options. Maybe your advisors have no options. It just depends on the specific scenario. But you want to try to keep it as low as possible, especially if you're the one choosing it. If you're going out to Vanguard or Fidelity or Charles Schwab, then you should not have a problem finding expense ratios lower than that. Now, let me show you the impact of these expense ratios and why this is so incredibly important. So, we ran the numbers to see what would happen if you invested $10,000 every single year and you got a 7% rate of return. Now, this is over the course of 30 years, and I think a 7% rate of return is something that is a conservative rate of return over the course of the next few decades. But if you looked at this and you got a 7% rate of return and you had a 0.05% expense ratio,

• 11:41Andrew Giancola?

  which is very normal for Vanguard index funds, it is very normal for ETFs to get a 0.05 expense ratio. If that happened, the total amount you would have paid over the course of 30 years is $8,455. And your portfolio value would be $936,000. Now, let's say you spent a 0.15% expense ratio. Well, your portfolio is going to have paid $25,113 and the future value would be $919,000. But as we start to jump this up, let's say, for example, you paid a 0.35 expense ratio. Well, that is 0.35 expense ratio is $887,000 is what your portfolio would be worth,

• 12:25Andrew Giancola?

  and you would have paid $57,445 out of pocket. That's a huge, huge difference. But what I want you to note here is as I start to talk about the total fees paid, you're also missing out on the opportunity cost of that money. That money could be compounding to a much greater number if you were not paying those fees. So, you've got to remember that that's a huge, huge impact when it comes to your money. If I'm paying $57,000 out of pocket going forward, I want to make sure I'm paying somebody to help me invest my money instead of paying it to some sort of mutual fund manager or something like that. You can find a fee-only advisor or something along those lines that's going to actually help you with your money if you're going to pay that much in fees.

• 13:06Andrew Giancola?

  Anyways, next, we have a 0.65% expense ratio. I'm just going to jump it up here each time. Your total portfolio value would be $841,000. So now we're looking at $100,000 difference. And you would have paid out to that index fund $103,000. Now, let's look at the major impact of a 1% fee. A 1% fee would take your entire portfolio down to $783,000. And you would have paid $160,000 over the course of 30 years in fees. And then a 1.15% is $770,000. And you would have paid $174,000 in fees. Fees really, really matter. And what this analysis I just did does not factor in is also the opportunity cost. Because the opportunity cost is going to shift to millions of dollars.

• 13:51Andrew Giancola?

  Because if you do the math on what you invested there. Say, for example, you were thinking through $10,000 per year over the course of 30 years. Well, you invested $300,000 into those fund. Well, if you're paying $174,000 in fees, imagine how much more that fund would grow if you actually had those dollars to reinvest over that timeframe. So that's how impactful fees can be. It is a million dollar decision to make sure you lower your assets fees. Meaning your index funds or your mutual funds, they need to have very low fees. Because there are some fantastic funds out there with great returns that have low fees. Next was what I look at is turnover ratio. So when we're looking at fees and cost efficiency, fees are first. Then I look at the turnover ratio.

• 14:35Andrew Giancola?

  Now, the turnover ratio is something that measures how frequently the fund buys and sells stock. A lower turnover ratio, under 10%, is way, way better for tax efficiency. So what I really look at here is I first, if a fund has a turnover ratio higher than 50%, if that turnover ratio is above 50%, A, it's most likely a mutual fund. B, if it's an index fund, I am not looking at it. Why? Because that means they are buying and selling way too many securities. What is the purpose of an index fund? The purpose of an index fund is to mirror the index. You must be able to mirror the index. If you cannot mirror the index and you're just buying and selling securities left and That means you're doing way too much out here. You're doing too much.

• 15:20Andrew Giancola?

  And so you need to make sure that if you have an index fund, you're keeping that turnover ratio lower. Why? Because you pay less taxes the lower the turnover ratio. And so we need to make sure that that turnover ratio is low. So for broad market index funds, typically, the turnover ratio is going to be very, very low. You want it to be like right around 5, 10%, somewhere in that range. That's going to give you a great indicator as to how much they are buying and selling investments. Now mutual funds, for example, they're going to have really high turnover ratios because they have a professional money manager. They have a whole team of Harvard and Yale graduates who are sitting in some sort of high-rise out there, which is why you are paying them 1% expense ratio. You are paying for the high-rise. You are paying for the Harvard graduate salary.

• 16:05Andrew Giancola?

  You are paying for the fund manager's salary. And so that's why mutual funds have such high expense ratios, which is why I want you to avoid a lot of these mutual funds because the expense ratios are so high. So we want to make sure that when we look at some of these turnover ratios, we want to make sure that they are below 50% is the first benchmark. But secondly, you really want it below 20% if you're going to invest in something like that. And so really, the sector funds are going to be right around that 20% range. And then actively managed funds are often 50% plus. For example, VFIAX, who are you, we are using in this example, has a turnover ratio of 2%, which means it's very tax efficient. It's a very, very tax efficient investments. Now ETFs tend to be even more tax efficient than mutual funds

• 16:50Andrew Giancola?

  due to their structure. And so funds with those lower turnover ratios and capital gains distributions tend to be more tax friendly. ETFs also do that, which is great. So index funds, ETFs, I'm using them interchangeably here. They are different, but I'm using them interchangeably here just because the purpose of both of them is to mirror an index. So if you like VOO or VTI more than the index fund, then that is great too. Next, we're going to get into performance and risk metrics. My relationship with money has changed a lot over the years. Early on, I thought building wealth was about making more money. Now, I know it's really about having clarity. When you know exactly where your money is going and whether you're on track, you make better decisions. That's one of the reasons I love Monarch. It's the personal finance app that tracks everything,

• 17:35Andrew Giancola?

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• 18:17Andrew Giancola?

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• 19:01Andrew Giancola?

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• 19:46Andrew Giancola?

  It's kind of amazing how much can change in just a single year. Every summer, the kids are a little bigger, a little more independent, and life looks a little different than it did the year before. And it reminds me that while we can't predict the future, we can prepare for it. That's one of the reasons I like PolicyGenius. See, PolicyGenius isn't an insurance company. They're an online marketplace that lets you compare life insurance quotes from some of America's top insurers, side by side, for free. And their licensed team helps you compare coverage, prices, and terms, answers your questions, and even handles the paperwork so you can get the right policy without the hassle. For me, having life insurance isn't about expecting something to happen. It's about knowing my family is protected

• 20:31Andrew Giancola?

  so I can actually enjoy these moments together, instead of worrying about what comes next. And with PolicyGenius, you can find 20-year life insurance policies, starting at just $276 a year for $1 million of coverage. Head to policygenius.com to compare life insurance quotes from top companies and see how much you can save. That's policygenius.com. All right. So the next thing I look at is how has this fund performed over the last few decades? And this is going to be a very important metric for you to look at as well, and measure this up with other funds in that sector. And so what I mean by that is what is the rate of return this fund has had over the course of the last couple of years?

• 21:14Andrew Giancola?

  So first, I'll look at the one-year rate of return, just to make sure it measures up with all the other funds in the industry. So if I'm looking at an S&P 500 index fund, I want to make sure if the fund returned 10% last year, I want to make sure that this fund also returned 10%, because the purpose of index funds and ETFs, again, is to mirror the index. Is not mirroring the index, then all of a sudden that rate of return is going to be off. I have seen funds where they are off one, two, or three percent. And that can be a massive difference in your rate of return in the long run. If you were trying to mirror an index, you want to make sure that they are not too far off on the one year. The one year, though, does not matter in the long run, meaning that I do not want you to rely on one year rate of return in order to make your decision.

• 21:59Andrew Giancola?

  The stock market in the short run is a voting machine. In the long run, it is a weighing machine. We don't care what happens over the course of year over year. We don't care what happens every five years. What we care about is decades when we are long-term investors. And we as wealth builders are long-term investors. And so we care what happens over the course of 10, 20, 30, 40, and 50 years. So secondarily, I will look at that five-year return to see what happens. All I'm doing with the one year and the five-year is just comparing against other funds to make sure they are all equaled out. And then I look at the actual S and P 500, for example, if I'm investing in an S and P 500 index fund. I'll look at the actual S and P 500 and make sure they are as close as possible. Now, if they're slightly off, that's completely fine.

• 22:43Andrew Giancola?

  It is very normal to be slightly off, but if they got to be as close as possible in order to make sure that they are mirroring that index properly. Then we're going to look at the 10-year plus return. So the 10-year plus return is going to help you gauge long-term reliability. Now, if it's a newer fund, for example, then it may only have one-year and five-year returns. I don't love investing in newer funds because of this. A great example of this is QQQ. So QQQ is a newer fund. And typically, if you look at QQQ, it's one of the most popular funds out there because they invest a lot of money into advertising. I think they do Super Bowl commercials all the time. And somewhere I read that they do like hundreds of millions of dollars in advertising at QQQ. Now, if you look at QQQ, it doesn't have as long of a time horizon as some of these other funds.

• 23:24Andrew Giancola?

  And so you want to make sure you have the history to be able to go and look back as far back as you possibly can. And so what I really like to look at is I look to look at the 10-year, the 20-year, and the 30-year to give more insight on full performance in the economic cycles. Again, I go back to 2007 and 2008. I go back to the tech bubble if it goes that far back. I will go back to the early 90s when Were surging. There's a lot of different things that happened over the course of the last few decades that you can look and see what happened during some uncertain times? And how does that impact my money going forward? And so that's how I like to think about some of this stuff when it comes to looking at the past.

• 24:01Andrew Giancola?

  And so you can go back and look and for example, if you look at VFIA X or FX AIX and you can kind of compare the two and see what the differential is. Over the course of one year, you know, they had the same rate of return at 10.2%. Over the last five years, they had the same rate of return over the last 10 years and over the last 20 years. That should be very normal. That should be something where if they are mirroring the index, they should be very close in their rate of return. And the standard deviation should not be much off. A slight standard deviation should be what these returns can fluctuate. But outside of that, it should not be anything crazy whatsoever. And then the other thing that I look at, and this is more of an advanced thing that you don't have to look at, but this is just going to be the max drawdown.

• 24:40Andrew Giancola?

  So with the max drawdown, I look at the worst peak to trough decline, meaning the peak is obviously the top of the market cycle. When did this index fund peak last? And then when was the last time that it actually bottomed out? And what is that difference right there? If you measure that difference with each and every single index fund, it should be very close to the S and P 500. For example, if you are measuring against the S and P 500. And so if it is way, way off, why did it decline so much? Or why did it peak so much more than what the S and P 500 did? You don't really want it to be that far off because again, we're trying to mirror the index. Now let's get into number four, which is the yield. All right. So with number four, we are trying to look at the yield or the dividend yield,

• 25:25Andrew Giancola?

  which measures the annual dividend payments as a percentage of the fund price. So if you're looking at broad market index funds, a typical yield is going to be like 1.3% to 2.5%. And if you're looking at high dividend funds, which S C H D is an example of that, they're really right around 3% to 5%. And so for example, VFIA X has a 1.5% yield. Well, S C H D has a 3.7% yield. So if your play is to go out there and you Want high dividend funds, then looking for a higher yield when you're looking at that index fund is going to be really, really important to you. In addition, you want to look at the dividend growth rate. So the rate at which the dividends will increase over time is a

• 26:08Andrew Giancola?

  very important metric for dividend investor. And if you're investing in these funds so that you can have an income coming in based on whatever that dividend yield is, then you want to make sure that you are looking at that growth rate as well. Now, the S and P 500's dividend over the course of the last few decades has grown about 6% every single year. And so that's just another number that you want to make sure that you are looking at. And then the payout consistently of the fund, you want to make sure that that fund is paying out that dividend when it is supposed to. And so you want to look at historically, when those dividends were paid out, and whether it has a full fund history of cutting dividends during downturns. That's why I like to see 2007 and 2008. I want to see who cut their dividends, because dividends and reinvesting those dividends is a very important metric when you want to look at the total rate

• 26:52Andrew Giancola?

  of return. And so you want to make sure that you are looking at that for sure. Now, number five, the next thing I look at is I do portfolio comparison with the top holdings. And what you want to know is what are the top holdings and how are they weighted? Specifically, the top 10 holdings. The top 10 holdings are very important when it comes to index fund and ETF investing. And so you can go and look up some of these funds and say to yourself, well, what are the top 10 holdings of this fund? So first, I'm going to look at VFIA X to give you an example of some of the top 10 holdings here at the time I'm recording this. Okay. So the top 10 holdings in VFIA X, which is the S and P 500 index fund are Apple, Microsoft, Nvidia, Amazon, Facebook

• 27:36Andrew Giancola?

  Class A shares, Alphabet, which is Google, Class A shares, Tesla, Broadcom, Alphabet Class C shares, and then Berkshire Hathaway, which is Warren Buffett's company. Those are the top 10 holdings in the S and P 500. Now, these will shift over time. And if you can go look at a stock market chart of 2000, you can go look at one of 2010, of 2020, and now, at the time I'm recording this, and you will see there are going to be very different companies in those top 10 holdings over time. The beautiful thing about index funds and ETFs. Is when companies start to struggle, a better company comes into play and you are still invested in that fund, which is why I love index funds and ETFs. But I like to compare the top 10 holdings to make sure they are weighted properly. A, and in addition, they are also very close to the S and P 500 because this really matters.

• 28:21Andrew Giancola?

  The top 10 holdings, especially in something like an S and P 500 are going to be the majority of the fund. And so you want to make sure that those are weighted properly. And so I always look at the top 10 holdings to see what those companies are. But I really like to even stretch it out to the top 25 holdings. Because when you look at the top 25 holdings, you can see what else is heavily weighted in this fund. So you can go beyond that and see, you know, Tesla, Home Depot, Lowe's, there's going to be a bunch of other companies in that top 25 holding, for example, in the S and P 500. Then I look at the sector allocation. What is the sector allocation? This makes sure that your fund is actually diversified. So when I look at VFIAX, for example, I'll see that 10% of it is in communication services. 11% is in consumer discretionary. 5.5% is in consumer staples.

• 29:04Andrew Giancola?

  So Johnson and Johnson, healthcare companies, those types of things. Energy is 3.2%. Financials is 14.10%. Healthcare is 10.5%. Industrial is 8.3%. Now, the next one, which is information technology, tech, is 30%. That is very normal. Tech is always going to be highly weighted in the S and P 500 because they are some of the most profitable companies in the country right now. Materials, 1.9%. Real estate, 2.1%. Utilities, 2.3%. Utilities help out with some of that volatility, especially when times get tough. So this is how this is kind of weighted and structured. And so you can see this is heavily weighted in IT and technology, but there's some other great weighting as well in terms of financials and healthcare and some of these other things.

• 29:49Andrew Giancola?

  So I like to look at sector allocation and make sure that we understand what is going on. Then I look at market cap. So market cap identifies what the fund focuses on. You have seen, there's all these different kinds of funds, like large cap funds, which is what the S and P 500 or the total stock market fund would be. There's mid-cap funds and then there's small cap funds. You just want to understand what you're investing in and making sure that you have exactly what you're looking for. And then geographic exposure. For me, I don't invest a ton of international funds. Instead, I like to find funds like the total stock market index fund that also have international business being done. And so, for example, VX US, which is Vanguard's total international ETF, has 15% exposure in Japan, it has 10% in the UK, it has 8% in China.

• 30:33Andrew Giancola?

  That's the kind of thing you want to see if you're investing in an international fund. You want it to be spread across some of these economies that are established to make sure that they are tracking correctly. And so that's how we want to look at that one for sure when it comes to portfolio composition. Now, what we're going to do is we are going to look at the fund size. So one thing we want to note is how much assets does the fund have under management? And so when you look at some of these assets under management, is it a very large fund? Is it a small fund? Because this can mean that anything under $100 million can be risky if the fund is going to get into trouble. And so if the fund gets in trouble, if it's under $100 million, that risk level goes up in comparison to a lot of other funds which have trillions of dollars.

• 31:15Andrew Giancola?

  In fact, something like SPY, which is the S and P 500 ETF, trades $30 billion daily. So you can see that drastic difference with some of these funds. And you want to look at that average daily volume as well when you look at some of these funds. Now, one big thing to do, and as we're getting closer here to wrapping up, one big thing we do is we want to also look at competitor comparison. So let's take the S and P 500, for example. The last thing I want you to do is just pick one S and P 500 index fund because somebody online told you to. Instead, I want you to compare it to all the other S and P 500 funds that are some of the big ones in the market. And so you can look at, let's take VFIAx, which we've been using as an example so far in this episode. If you look at VFIAx, which is Vanguard's S and P 500 index fund,

• 31:59Andrew Giancola?

  you also want to compare that to Fidelity's index fund and Schwab's index fund and the ETFs. And so what I would do is I would take VFIAx and compare it to Fidelity's FXAIX. And I would compare it to Schwab's SWPPX. And then I would also look at the ETFs. Now, usually Fidelity, Vanguard, Schwab, those are the three that I look at. You can also look at something like iShares, which is BlackRock's portfolio. You can look at Spider. There's a bunch of other. Other ones out there. And then I look at the ETF. So SPY, or VOO, or IVV. Those are all going to be compared on one little chart there. And then you can go back and forth and see some of the rate of returns. What you're going to notice is most of them are pretty close. And then you just pick the one where your brokerage is, or whatever is easiest for you.

• 32:43Andrew Giancola?

  But you want to make sure that you are comparing all those to see if there's any discrepancies that might be there. And then last thing is I want you to think through some of the risk factors and potential drawbacks. So I want you to think through the market risk. And that's why we always like to look at the history and what would happen if the market crashes? Or if your investment goes down in some way, shape or form? I want you to look at the sector risk. So if you're looking at international funds, for example, or if you're doing bond funds, or if you're doing funds in emerging markets, what is that sector risk? And are you taking too much of a risk based on your specific risk tolerance? And then the foreign exchange risk, that's a big one. I think a lot of people don't think through. But international funds may fluctuate with currency swings. So sometimes there will be a president, or a prime minister, or someone across the world

• 33:27Andrew Giancola?

  who says one or two things, and all of a sudden, international funds will fluctuate because the currency is going to swing. And so you got to make sure that you understand some of those currency risks as well. There's a lot of risks that come into play with international funds that we don't think about always here in domestic funds in the US. So final thoughts that I want to give you here. When analyzing an index fund, I want you to look at low expense ratios as number one. Two, consistent performance over the course of decades in comparison to their peers. Three, I want you to look at that low turnover ratio so we can get some tax efficiency going. I want you to look at diversification across holdings and low tracking error to the benchmark. And we want to make sure that we do that side by side comparison. All of those are really, really important to make sure that you are making the right selection.

• 34:12Andrew Giancola?

  Because the last thing I want you to do is go out, make a selection with some fund. You're paying way too high of an expense ratio, and it's not tracking properly in comparison to the index. So that's going to be really, really important. Listen, if you guys want to learn more about investing in index funds and ETFs, again, we have Index Fund Pro available for you. If you go to mastermoney.co/courses, check out Index Fund Pro. That will take you from beginner all the way to advanced. When it comes to index fund investing and if you're getting value to this episode, consider sharing it with a family member or friend and leaving a five star rating review on Apple Podcasts, Spotify, or your favorite podcast player. I cannot thank you guys enough for listening to this episode and we will see you on the next episode.