An index fund tracks a market index — like the S&P 500 — instead of trying to beat it. Here's why that simple idea has made index funds one of the most effective investment vehicles available.
An index fund is an investment fund designed to match the performance of a specific market index — like the S&P 500 or the total U.S. stock market — rather than trying to beat it.
Instead of a fund manager picking stocks, an index fund simply buys the stocks in its target index. If the S&P 500 goes up 12%, an S&P 500 index fund goes up approximately 12%. Passive investing by design.
A market index is a list of stocks selected to represent a market or segment — a measuring stick.
| Index Fund | Actively Managed Fund | |
|---|---|---|
| Strategy | Mirrors a market index | Manager picks stocks/bonds |
| Cost | Very low (0.03%–0.20%) | Higher (0.50%–1.5%+) |
| Goal | Match the market | Beat the market |
| Long-term result | Matches it (minus small fee) | Underperforms ~85–90% of the time over 10+ years |
They're cheap. 0.03%–0.10% per year.
They beat most active managers long-term. Matching the market is better than what most active funds deliver after fees.
Instant diversification. One total market fund = 3,500+ companies.
Simplicity. Buy, hold, let time work.
Index ETFs — trade on a stock exchange. Buy through any brokerage. Examples: VOO, VTI.
Index mutual funds — bought from the fund company, priced once daily, often $1,000–$3,000 minimum. Examples: VTSAX, VFIAX, FSKAX.
| Fund | Index Tracked | Expense Ratio |
|---|---|---|
| VTSAX | CRSP US Total Market | 0.04% |
| VFIAX | S&P 500 | 0.04% |
| FSKAX | DJ U.S. Total Stock Market | 0.015% |
| FXAIX | S&P 500 | 0.015% |
Are index funds safe? They carry market risk — they go up and down with the market. Broad U.S. index funds have recovered from every historical downturn, but past performance doesn't guarantee future results.
Is an index fund the same as an ETF? Not exactly. "Index fund" is the strategy (passive). "ETF" is the structure (exchange-traded). Many ETFs are index funds; some index funds are mutual funds. See: What Is an ETF?
An index fund tracks a market index passively at minimal cost. Decades of evidence support passive index investing as one of the most effective strategies for long-term wealth building.
Related: What Is an ETF? · ETF vs Mutual Fund · Compare VTSAX vs FSKAX
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Dan Mahler built CompareMutualFunds.com to give everyday investors a clear, jargon-free resource for comparing mutual funds. All content on this site is reviewed for accuracy before publication. Fund data is sourced from public financial filings and updated regularly.
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