Index Fund
A mutual fund or ETF designed to replicate the performance of a specific market index, such as the S&P 500. Index funds offer broad diversification at very low cost.
An index fund is a passive investment vehicle that aims to match—not beat—the returns of a particular market benchmark. Pioneered by John Bogle of Vanguard in 1976, index investing has grown to represent trillions of dollars in assets and has fundamentally changed the investment industry.
Why Index Funds Work
The case for index funds rests on several pillars:
- Low fees — Expense ratios as low as 0.02%–0.05% for major index funds
- Consistent performance — Over 15-year periods, roughly 90% of actively managed funds underperform their benchmark index after fees
- Simplicity — No need to research individual stocks or evaluate fund managers
Common indices tracked by index funds include the S&P 500, the total U.S. stock market, international developed markets, and the Bloomberg Aggregate Bond Index. Combining several index funds or ETFs is a straightforward way to build a diversified asset allocation.