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Index Fund
Definition
An index fund is a type of mutual fund or ETF designed to track the performance of a specific market index, like the S&P 500.
Explanation
Index funds offer broad market exposure, low costs, and consistent performance. They are passively managed, so expense ratios are much lower than actively managed funds. Warren Buffett has recommended low-cost index funds as the best investment for most people.
The key advantage is that over long periods, most active managers fail to beat their benchmark index. Index funds guarantee you capture the market return minus minimal fees.
Example
An S&P 500 index fund with a 0.03% expense ratio charges $3 per year on a $10,000 investment. An active fund at 1% charges $100 for the same amount.