Index Funds
Index funds skip the hard part: instead of trying to beat the market, they simply track it, at much lower fees.
By Greg Goodwin · Published July 3, 2026 · Updated October 24, 2026
Cheat Sheet
- An index fund is an investment fund designed to track the performance of a specific market index, such as the S&P 500, rather than trying to actively pick individual outperforming stocks.
- Because index funds simply track a pre-defined index rather than requiring active stock-picking research, they typically charge significantly lower fees than actively managed funds.
- Extensive long-term research has repeatedly shown that the large majority of actively managed funds fail to consistently outperform their relevant benchmark index over long time periods, after accounting for fees.
- Index funds provide instant diversification across many companies within a single investment, reducing the risk associated with any single company's poor individual performance.
- John Bogle, founder of Vanguard, played a pivotal role in popularizing low-cost index investing for everyday individual investors starting in the 1970s.
- Index funds are available covering a wide range of different market indexes, including broad total-market funds, specific sector funds, and international market funds, not just the well-known S&P 500.
The 60-Second Version
An index fund is an investment fund designed to track the performance of a specific market index, such as the S&P 500, rather than trying to actively pick individual outperforming stocks. Because index funds simply track a pre-defined index rather than requiring active stock-picking research, they typically charge significantly lower fees than actively managed funds. Extensive long-term research has repeatedly shown that the large majority of actively managed funds fail to consistently outperform their relevant benchmark index over long time periods, after accounting for fees. Index funds provide instant diversification across many companies within a single investment, reducing the risk associated with any single company's poor individual performance. John Bogle, founder of Vanguard, played a pivotal role in popularizing low-cost index investing for everyday individual investors starting in the 1970s. Index funds are available covering a wide range of different market indexes, including broad total-market funds, specific sector funds, and international market funds, not just the well-known S&P 500.
The Long Version
Tracking the Market Instead of Trying to Beat It
Rather than employing a fund manager to actively select individual stocks in an attempt to outperform the broader market, an index fund is designed simply to track the performance of a specific pre-defined market index, such as the S&P 500, effectively aiming to match overall market performance rather than beat it.
Why Fees Matter So Much Over Time
Because index funds don't require the extensive active research and trading involved in actively managed funds, they typically charge significantly lower ongoing fees, known as expense ratios, a difference that can compound substantially over long investment time horizons, meaningfully affecting an investor's total returns even when the funds' raw performance is otherwise similar.
The Research Behind Passive Investing's Popularity
Extensive long-term research comparing actively managed funds against their relevant benchmark indexes has repeatedly found that the large majority of actively managed funds fail to consistently outperform their benchmark over long time periods, once fees are properly accounted for, a body of evidence that has significantly driven index funds' growing popularity among both individual and institutional investors.
From a Niche Idea to Mainstream Investing
John Bogle, founder of Vanguard, played a pivotal role starting in the 1970s in popularizing low-cost index investing specifically for everyday individual investors, an idea that was initially met with considerable skepticism within the investment industry but has since become a mainstream, widely recommended core investment strategy, available today across a wide range of different indexes, including broad total-market funds, specific sector funds, and international market funds.
Why People Care
Index funds have made low-cost, broadly diversified investing accessible to everyday individual investors, and understanding the research and reasoning behind their popularity helps clarify one of personal finance's most consistently recommended core investment strategies.
Glossary
- Market index
- A defined collection of stocks or other securities, such as the S&P 500, used to measure overall market or sector performance.
- Actively managed fund
- A fund where a manager actively selects specific investments in an attempt to outperform a benchmark index.
- Expense ratio
- The annual fee charged by a fund, typically significantly lower for index funds than for actively managed funds.
- Diversification
- Spreading investment across many different assets to reduce the risk of any single asset's poor performance.
- John Bogle
- The founder of Vanguard, widely credited with popularizing low-cost index investing for individual investors.
Go Deeper
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