Index Fund
The simplest, lowest-cost way to own a piece of the entire stock market.
What Is an Index Fund?
An index fund is a type of investment fund — either a mutual fund or ETF — designed to track and replicate the performance of a specific market index. Rather than employing stock-pickers trying to beat the market, an index fund simply owns all (or a representative sample) of the stocks in that index in the same proportions.
The most common example: an S&P 500 index fund holds shares in all 500 companies in the S&P 500 index — companies like Apple, Microsoft, Amazon, and Google — giving you instant exposure to 500 of the largest U.S. companies with one fund.
Pioneered by Vanguard founder John Bogle in 1976, index investing is now the dominant investment strategy for individual investors worldwide.
Why Index Funds Win: The Numbers
Over any long period, the majority of actively managed funds underperform their benchmark index — and the margin gets wider the longer you look:
| Period | % of active funds underperforming S&P 500 |
|---|---|
| 1 year | ~55% |
| 5 years | ~75% |
| 10 years | ~85% |
| 20 years | ~90%+ |
Source: S&P SPIVA® Scorecard (ongoing research). The longer the time horizon, the worse active management looks relative to passive indexing.
The Fee Advantage
The primary reason index funds win is cost. A typical actively managed fund charges 1–1.5% per year. Index funds charge as little as 0.03%. On a $100,000 investment over 30 years at 7% gross return:
| Fund Type | Expense Ratio | Final Balance | Lost to Fees |
|---|---|---|---|
| S&P 500 Index Fund | 0.03% | $749,022 | $2,278 |
| Average Active Fund | 0.75% | $664,387 | $86,913 |
| High-Cost Active Fund | 1.50% | $498,395 | $252,905 |
Popular Index Funds
Calculate It Yourself
See how regular index fund investing grows over time.