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I have heard that S&P Index Funds have outperformed most mutual Funds, and I would like to know more about them. How do they work?

1. If a fund tracks the S&P Index by buying shares of each stock in the S&P, what happens to the dividends and distributions produced by these stocks? Are they distributed to the Fund owners, or reinvested?

2. How can I tell if a specific Index Fund, like Vanguard is overpriced?

3. The S&P is near a historical high. Is now a good time to invest?

I would appreciate any response.

cgunthor

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Greetings, Cgunthor, and welcome. You asked:

<<I have heard that S&P Index Funds have outperformed most mutual Funds, and I would like to know more about them. How do they work?

1. If a fund tracks the S&P Index by buying shares of each stock in the S&P, what happens to the dividends and distributions produced by these stocks? Are they distributed to the Fund owners, or reinvested?>>


Just as in any other mutual fund an index fund must distribute it's interest and dividends to its shareholders. If desired, they may be reinvested in additional shares. If the fund is held in a taxable account, the distribution is still taxed to the sharehholder. If the fund is held within an IRA, there is no tax impact until withdrawals start from the IRA.

<<2. How can I tell if a specific Index Fund, like Vanguard is overpriced?>>

How do you tell if any fund is "overpriced?" In reality, you can't. Net Asset Values (or share prices) are a function of the market value of the shares held by the fund, the expenses of the fund, and the money invested by shareholders of the fund. In theory, the share price of the fund multiplied by the number of outstanding shares of that fund will equal the market value of the stocks held by the fund plus any cash on hand. In that sense the fund's shares can never be overpriced -- Only the stocks shares the fund owns can.

<<3. The S&P is near a historical high. Is now a good time to invest?>>

That's up to you. Investing is long term. If you hold for a number of years, today's price will seem small in comparison to the price then. The inexorable pressure on the market is up. Sure, the market will go down. It will also recover and go on to newer highs. Accordingly, to a Fool today's price means little. We care about the price 5, 10, or 20 years in the future.

Regards….Pixy

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