Index Fund
An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific market index — such as the S&P 500, the total US stock market, or a bond index — by holding all (or a representative sample) of the securities in that index.
How Index Funds Work
Unlike actively managed funds, which rely on analysts and portfolio managers to select individual securities, index funds follow a passive strategy: simply hold what the index holds, in the same proportions. When a company is added to or removed from the index, the fund adjusts automatically.
The Cost Advantage
The primary advantage of index funds is dramatically lower cost:
| Fund Type | Typical Expense Ratio | Impact on $100,000 over 30 years at 8% | |-----------|----------------------|----------------------------------------| | Index fund | 0.03–0.20% | ~$950,000 | | Actively managed fund | 0.75–1.5% | ~$760,000 |
A 1% difference in fees compounds into $190,000+ in lost wealth over 30 years.
The Performance Reality
Decades of academic research and Vanguard founder Jack Bogle's life work established a counterintuitive truth: the majority of actively managed funds underperform their benchmark index over any 10-year period, after fees. By simply buying the index, you outperform most professional investors.
Most Common Index Funds
- S&P 500 Index — 500 largest US companies (VOO, SPY, FXAIX)
- Total US Stock Market — All US public companies (~4,000 stocks) (VTI, FSKAX)
- Total World Market — US + international (VT)
- Total Bond Market — Broad US bond exposure (BND, FXNAX)
Related Tools
- Compound Interest Calculator — Model long-term growth at historical index return rates
- CAGR Calculator — Calculate the actual annualized return on any index investment
- Retirement Calculator — Project retirement savings with index fund returns