Index fund

In detail

An index fund aims to match the holdings and return of a market index rather than actively selecting securities. It buys what the index contains, in the proportions the index specifies, and accepts the index's return minus costs. Index ETFs and index mutual funds are the two common forms; the difference is mostly in how they trade, not what they hold. The argument for them is cost and evidence. Because there is no research team to fund, expense ratios are typically a few basis points against a percent or more for active funds — and over decades that gap compounds into a large difference. The persistent finding in the data is that most active managers underperform their benchmark after fees over long periods. Two things people misread. "Index" does not mean "diversified": an index tracking a single sector or a narrow theme concentrates risk rather than spreading it, and a market-cap-weighted index can end up heavily exposed to a handful of large companies. And tracking the index means tracking it down as well as up — an index fund offers no protection in a falling market, by design.