THE MOTLEY FOOL

ASK THE FOOL Index funds best?

Q: Are index funds the best mutual funds for beginners?

J.L., Albuquerque, N.M. A: Index funds are terrific not only for beginning investors but also for seasoned ones. Investing without them can be a lot of work, requiring you to study lots of stocks, bonds or mutual funds, make many decisions and keep up with your holdings.

Meanwhile, a low-fee, broad-market index fund offers a quick and easy way to own an assortment of securities that track an index and earn roughly the index’s return.

For example, an S&P 500 fund will allow you to instantly invest in 500 of America’s biggest companies and earn the return of the S&P 500 index (less fees). Many of the 500 companies have significant global operations as well, giving you international diversification.

There are broader index funds, too; some track the entire U.S. stock market or the world market, while other index funds might focus on bonds, small companies or particular regions. For whatever kinds of investments you seek, there’s often an index fund.

Q: Is a return on equity above 100 percent good or bad for a company?

G.H., Santa Maria, Calif. A: It depends. Return on equity (ROE) reflects the productivity of a company’s net assets (assets minus liabilities). You calculate it by dividing net income by shareholder equity. Net income is found on a company’s income statement, while shareholder equity is found on the balance sheet. In general, the higher the ROE, the better.

However, some ROEs can be artificially high if the company has taken on a lot of debt or has bought back a lot of shares. These actions shrink shareholder equity, driving up ROE.

FOOLISH TRIVIA Name that company

I trace my roots back to 1852, before the Civil War, when two fellows created me to buy, sell and transport valuables such as coins and gold dust (from the gold rush).

By 1866 I had stagecoaches crisscrossing the West and Midwest. I split my banking and transport businesses in 1905.

Today, with a recent market value topping $150 billion, I’m a major financial services company with nearly $2 trillion in assets; I serve about a third of American households and more than 10 percent of U.S. small businesses. Regulators forced me to pay billions of dollars in fines and restitution in 2022. Who am I?

Last answer: Yum! Brands

THE MOTLEY FOOL TAKE

Chew on this

Shares of leading online pet-care brand Chewy (NYSE: CHWY) were recently down more than 26 percent from their 52-week high, in part due to slowing revenue growth. But Chewy is emerging as the go-to online destination for convenient access to a large selection of pet food and other essentials.

It’s starting to turn a profit as it expands, and it looks like an attractive investment opportunity.

Pet care is on the rise. As of late 2022, there were 5 million more pets in the U.S. than in 2019, and analysts at Morgan Stanley expect the pet industry to grow from $118 billion in 2019 to $277 billion by 2030. Chewy is well-positioned to capitalize on this opportunity. Its revenue has already doubled over the last three years.

The company reported a small profit of $6.1 million on $2.7 billion of revenue in the fourth quarter, in a reversal of earlier losses. Chewy is starting to benefit from supply chain improvements as well as growth in pharmacy and other high-margin services.

Chewy is copying Amazon’s playbook. It’s not only offering an enormous selection of thousands of pet products, but it’s also adding services on top of that, such as a pharmacy and an auto-ship program, to build customer loyalty. An improving profit margin makes Chewy look more like a genuine value for long-term investors. (The Motley Fool owns shares of and has recommended Chewy.)