Index Fund
An index fund is a portfolio of stocks or bonds designed to replicate the performance of a market index, such as the S&P 500. Index funds have lower fees than actively managed funds because no stock-picking is required.
When you invest in an S&P 500 index fund, you own a tiny slice of all 500 companies in the index, weighted by their market capitalisation. When Apple or Microsoft goes up, your fund goes up proportionally.
The key advantage is cost: a typical S&P 500 index fund has an expense ratio of 0.03%–0.10% annually, versus 0.5%–1.5% for actively managed funds. Over 30 years, that fee difference compounds into a significant wealth gap.
Research consistently shows that most actively managed funds underperform their benchmark index after fees over a 10+ year horizon.
Related terms
- Dollar-Cost Averaging (DCA)
- Dollar-cost averaging is an investment strategy where you invest a fixed dollar amount at regular intervals, regardless of price. It reduces the risk of investing a large sum at the wrong time.
- Rate of Return
- A rate of return (RoR) is the net gain or loss of an investment over a specified period, expressed as a percentage of the initial investment.
- Asset Allocation
- Asset allocation is the percentage split of a portfolio among different asset classes — typically stocks, bonds, and cash. It is the primary driver of long-term portfolio risk and return.