Index Fund
A fund designed to track the performance of a market index by holding the same securities in the same proportions.
What is Index Fund?
An index fund is a passively managed investment fund designed to replicate the performance of a market index by holding the same securities in roughly the same proportions as the index. Common index funds track the S&P 500, Dow Jones Industrial Average, Russell 2000, or total market indices. Because they require no active stock selection, index funds have dramatically lower expense ratios than actively managed funds — often 0.03%–0.20% compared to 0.5%–1.5% for active funds. Extensive academic research, including studies by Vanguard founder John Bogle, shows that the majority of actively managed funds underperform their benchmark index over long periods, largely due to higher costs.
Example
The Vanguard S&P 500 ETF (VOO) is an index fund with a 0.03% expense ratio that mirrors the S&P 500's 503 stocks in market-cap proportions. An investor who put $10,000 into VOO in 2013 would have over $35,000 by 2023, tracking the market almost exactly. An active fund charging 1% annually that matched the index would have returned only $32,000 over the same period — the 0.97% fee difference compounded into a $3,000 gap.