Glossary
Index Fund
An index fund is a mutual fund or ETF that holds the securities in a market index — such as the S&P 500 or a total-market index — seeking to match the market's return rather than beat it.
Because no managers are paid to pick securities, index funds are cheap to run; broad ones now charge a few hundredths of a percent annually. One purchase can hold hundreds or thousands of companies.
Why it matters in practice
The empirical case is blunt: over long periods, the majority of actively managed funds have trailed their benchmark index after costs, and the winners have been hard to identify in advance. Matching the market sounds unambitious but has historically outperformed most attempts to beat it. An index fund concedes it will never rank first in any single year — in exchange for rarely ranking near last and compounding quietly in between.
Related terms: ETF (Exchange-Traded Fund) · Mutual Fund · Passive Investing · Expense Ratio · Diversification