How to Understand What An Index Fund Invests In

When people invest for the first time they often begin with index investing. That’s because it is arguably the simplest and cheapest form of getting involved in the world of shares and funds.

What isn’t as straightforward, however, is choosing which index funds to put your money into.

That’s partly because when you start looking at funds, your screen will quickly be filled with a seemingly never-ending list of names and titles.

Here are some examples:

• HSBC European Index C Inc
• Vanguard FTSE 100 Index Acc
• Vanguard Global Small-Cap Index Acc
• Legal & General Future World ESG Europe ex-UK Index I

And that’s just four funds. There are thousands of similarly-named, equally confusing funds out there.

All funds listed in this guide are for example purposes only. Nothing we say should be considered as investment advice.

This can feel overwhelming — another jumble of unnecessary financial jargon prompting many wannabe-investors to run for the hills.

But take a deep breath.

We’re about to break down the names of index funds into separate parts — you’ll find the terms and nuances suddenly become much clearer.

While you will have to dig deeper to feel confident in your research, you can at least get a feel for what a fund covers when you know how to break down their names.

So, let’s break them down.

Fund provider

The name of the fund provider usually comes first. In the examples above it is HSBC, Vanguard, and Legal & General.

There are many other fund providers out there such as iShares, Fidelity and Xtrackers.

The fund provider — the fund manager — must act in the best interest of investors at all times.

Index

Next comes the name of the index which the fund is tracking. This is probably the most important part of a fund name as it tells you where your money is being invested.

Sticking with the examples from earlier, let’s look at the Vanguard FTSE 100 Index Acc.

This fund, provided by Vanguard, will track the performance of companies in the FTSE 100.

The FTSE 100 lists the 100 biggest companies on the London Stock Exchange. Other examples are funds which track the S&P 500, which is the 500 biggest companies in the US, or the Nikkei 225 which is the biggest 225 companies trading in Japan.

There are thousands of variations of indexes and you can find out what each one covers by searching for the name in Google, or ask your new modern AI-powered robot.

Location

The fund name may also tell you a specific geography which is being tracked.

The Fidelity Index World Fund, for example, tracks well over 1,000 companies from around the world — but 23 developed market nations, to be precise.

These are countries like the UK or US which have relatively high levels of economic growth and security.

The Vanguard FTSE Global All Cap Index Fund is also comprised of companies from around the world. However, the FTSE Global All Cap index includes both developed markets and emerging markets, which are countries like China, Brazil or Argentina which are moving to a modern, industrialised economy and higher living standards.

Sometimes the fund name will directly specify whether it is tracking Developed or Emerging Markets stocks.

It’s important not to feel overwhelmed at this point: you will never know an index fund inside-out from its name alone. All we want to do here is give you a little more knowledge than you had before so that you can get a better feel of an index fund so you can rule out lots of funds that you won’t be interested in without even needing to do any research.

To make things a little more simple, you will also see names of specific countries appearing, like ‘UK Index’ or a ‘US index’. This means that the companies being tracked and invested into are just those listed in the UK or the US.

You may also see Europe ex-UK or Asia ex-Japan. This means that these funds track companies all over Europe but not the UK, and companies all over Asia but not Japan.

Size

The ‘All Cap’ in the Vanguard FTSE Global All Cap Index Fund means that the fund tracks companies of all sizes.

If a fund says it is Small-Cap then that means that it tracks smaller-sized companies and if it is Mid-Cap then it tracks medium-sized companies.

So, a US Large-Cap fund will track large-sized companies in the United States.

Sector/Theme

The fund may be tracking an index focused on a specific sector. The Legal & General Global Technology Index Fund, for example, tracks IT companies around the world like Apple and Microsoft.

Or the index could be based around an economic, cultural or social theme. The FTSE Global Solar Energy Index tracks companies from a range of sectors which are connected with solar energy.

ESG

Given heightened concerns in recent years over climate change and the environment, there has been an increase in investor interest in so-called ESG investing.

ESG stands for Environmental, Social and Governance, and will appear in the name of relevant funds.

The emphasis here is looking to invest in companies which are doing their bit to improve the environment such as renewable energy, society including fighting racial discrimination, or governance in the form of doing business more ethically.

One of our examples — the Legal & General Future World ESG Europe ex-UK Equity Index — excludes companies for a variety of ESG related reasons.

This could be because of their involvement in fossil fuels or the manufacturing of weapons.

Other Investments

Not all index funds directly track companies. They can also track other investments such as bonds.

An example is the Vanguard Global Corporate Bond Index Fund which tracks the performance of bonds issued by companies around the world.

Acc/Inc

‘Acc’ and ‘Inc’ are also commonly seen in fund names. They are known as share classes.

We listed the Vanguard FTSE 100 Index Acc and the HSBC European Index Inc in our earlier examples.

‘Inc’ stands for income, which means that money made by the fund will be paid out to you in the form of a regular dividend. It will give you an income. Some funds also use the term ‘Dist’ which is short for distribution, but this means the same thing.

‘Acc’ stands for accumulation, which simply means that those dividends, instead of heading straight into your bank account, get reinvested back into the fund instead. The idea is that this will boost the value of the fund and that you will get a bigger amount of money when you eventually decide to sell.

Sometimes a fund won’t show either Acc or Inc within the name, and this can sometimes depend on the broker listing the fund, so you’ll need to check the fund page online for more information.

It’s important to remember that, regardless of whether a fund is an Acc or an Inc, the index will follow the same strategy and invest in the same companies. This only refers to the way any dividends you may be eligible for are handled.

A, B, C

There may also be letters such as A, B, C or I in the fund name. These are also share classes and can affect how much you are charged as well as minimum investment levels.

Confusingly, the letters can differ per provider. So, it pays to log onto the fund’s website and drill-down for more information.

UCITS

This term is also commonly found in index names. This stands for Undertakings for Collective Investment in Transferable Securities.

This lets you know that the fund has passed certain criteria set out by the European Commission and means that the fund can be sold anywhere within the European Union. The UK has also adopted this framework.

ETF

You will sometimes see — as above — ETF at the end of a fund name. This stands for Exchange Traded Fund.

These are funds which are traded, i.e. bought and sold, on an exchange throughout trading hours.

Tickers

You will often see acronyms below each of the fund names. They tend to be unique to the provider of the fund and can help you quickly identify it when you are looking for information.

An example is VUAG, which is Vanguard’s S&P 500 accumulative fund.

There are sometimes regional peculiarities to look out for, such as Vanguard’s S&P 500 UCITS ETF, which uses the VOO ticker in the US, but VUSA in the UK.

All of the terms above can be confusing but with a bit of time, patience and research, you’ll be able to filter through the blizzard of names to find the index fund which is right for you and your needs.

But just because you know what a fund covers, you still need to research as much as possible.

You need to fully understand what you are buying before you part with your cash.

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