Index Fund
Definition
A type of mutual fund or ETF designed to track the performance of a specific market index, offering broad diversification at low cost.
An index fund is a passive investment fund that aims to replicate the performance of a specific market index such as the S&P 500, the total stock market, or a bond index. Rather than trying to beat the market, index funds simply match it by holding all or a representative sample of the securities in the index.
The key advantage of index funds is their extremely low expense ratios, often as low as 0.03% to 0.10% annually, compared to 0.50% to 1.50% for actively managed funds. Over time, this fee difference compounds significantly. Studies consistently show that the majority of actively managed funds underperform their benchmark index over long periods.
Index funds are the foundation of the passive investing philosophy popularized by Jack Bogle, founder of Vanguard. A simple three-fund portfolio consisting of a total U.S. stock index, an international stock index, and a bond index provides diversified exposure to the global market at minimal cost.
Related Calculators
Related Terms
ETF (Exchange-Traded Fund)
financeAn investment fund that trades on stock exchanges like individual stocks, typically tracking an index, sector, commodity, or other asset class.
Mutual Fund
financeAn investment vehicle that pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities.
Diversification
financeAn investment strategy that reduces risk by spreading investments across different asset classes, industries, and geographic regions.
S&P 500
financeA stock market index tracking 500 of the largest publicly traded companies in the United States, widely regarded as the best gauge of large-cap U.S. equities.
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