Index funds

What index funds are, why low-cost index investing beats most professional fund managers over time, and how to use index funds as a portfolio core.

What they are

An index fund holds every company in a market index, in the index's proportions, instead of picking stocks. It aims to match the market, not beat it.

Why they work

  • Low costs. Fees compound just like returns. See Expense ratios and fund fees.
  • Most active funds lag. Year after year, the S&P SPIVA reports find that roughly 85 to 90% of actively managed US large-cap funds trail the S&P 500 over 15 years.
  • Diversification. One company's failure barely matters.
  • Automatic renewal. New leaders enter the index as old ones fade. See Market leadership cycles.
  • Low turnover keeps taxes down. See Portfolio turnover.

Common choices

Index Covers
S&P 500 500 large US companies
Total US market Nearly every US-listed company
Nasdaq 100 100 largest non-financial Nasdaq companies, tech-heavy
Total international Developed and emerging markets outside the US

Index funds and stock picking

Many investors hold an index fund as their core and research a smaller group of individual stocks around it. Your picks then have a clear benchmark: if they do not beat the index over time, the index is the simpler choice.

See also

  • What is an ETF? What an exchange-traded fund is, how ETFs differ from mutual funds and single stocks, the main types of ETF, and what to check before buying one.
  • Expense ratios and fund fees What an expense ratio is, how fund fees are charged, how much a 1% fee costs over decades, and typical expense ratios for index and leveraged ETFs.
  • Dollar-cost averaging vs lump sum Dollar-cost averaging compared with investing a lump sum at once: what the historical evidence shows, and when spreading purchases out still makes sense.
  • How many stocks should you own? How many individual stocks you need for diversification, what research says about 10, 20 and 30 stock portfolios, and the trade-off with conviction.

Pages that link here: Building your investing knowledge, Investing FAQ, Market leadership cycles, What is a stock?

Last updated September 30, 2026. Education only, not investment advice.