Matching the market on purpose
A stock-picking fund tries to find winners. An index fund does the opposite: it buys everything in a chosen index in the proportions the index sets, and tries to deliver that index’s return. Because nobody is deciding which stocks to buy, the fund can charge very little.
The idea was popularized by John Bogle, who founded Vanguard and launched the first index fund for individual investors in 1976. His argument was simple: after costs, the average investor in actively managed funds must earn less than the market, so keeping costs low is one of the few things you can control.
What is the S&P 500?
The S&P 500 is an index of about 500 of the largest US public companies. It is weighted by market value, so larger companies move it more than smaller ones. When people say “the market is up today” they often mean the S&P 500. You can watch it on our markets overview.
Other well-known indexes include the Dow Jones Industrial Average (30 large companies), the Nasdaq Composite (thousands of Nasdaq-listed companies, heavy in technology) and the Russell 2000 (smaller US companies).
Why costs matter so much
Fees come out of your return every year, whether the market is up or down. Over decades the gap between a very low fee and a high one can reach tens of thousands of dollars on a modest portfolio. We show the math in expense ratios explained.
The trade-offs
Index funds are not magic. Keep these in mind:
- You will never beat the market, and you will fall with it in a downturn.
- Many indexes are weighted by size, so a few giant companies can make up a large share of the fund.
- You still need a plan for how much to invest, how often, and what to do when prices drop. See dollar-cost averaging.
Quick answers
Index fund vs ETF: which is better?
They are two wrappers around the same idea. Many ETFs are index funds. Choose based on fees, how you invest (all at once or monthly) and what your brokerage offers.