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Index Funds

Overview

Index funds are pooled investment funds that buy shares of stock in order to replicate the performance of major stock indexes, like the Dow Jones Industrial Average or the S&P 500. Since these stock indexes—groups of companies organized together to provide a snapshot of one segment of the market—can't be invested in directly, index funds buy shares in the companies listed in an index to replicate its performance. Today, more than 120 million Americans are invested in mutual funds and exchange-traded funds (ETFs), the primary vehicles for index fund investing.

Pioneered by the investment firm Vanguard Group in the 1970s, index funds have become the cornerstones of many American retirement accounts due to their relatively consistent long-term performance, comparatively low costs, and inherent diversification.

On average, index funds that track the S&P 500, for instance, have an annual return of 10%. Index funds are also passively managed (meaning they simply track an index rather than relying on a fund manager's judgment), so they often have lower management fees than actively managed funds. Plus, because index funds spread investments across all companies listed in an index, the performance of the investment is less dependent on a single company's stock.

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