Index Investing

Key Benefits

Low costs, broad diversification, transparency, accessibility, often outperforms actively managed funds long-term (after fees)

Primary Goal

Match the performance of a specific market index

Key Drawbacks

Lack of downside protection, no control over individual holdings, inability to outperform the market

Market Impact

Dominant trend in capital markets, accounts for a substantial portion of U.S. fund assets

Investment Vehicles

Index funds, Exchange-Traded Funds (ETFs)

Investment Strategy Type

Passive

Cost Savings (since 2000)

Approximately $500 billion in lower expense ratios for index fund investors

1976

Index investing is a passive investment method achieved by investing in an index fund. An index fund seeks to generate returns from the broader market

Learn what an index fund is, how it works, and its benefits for investors. Explore Vanguard's index funds to help you achieve your financial goals.

Indexing is a passive investment strategy where you construct a portfolio to track the performance of a market index.

Web page about Index Investing sourced during research.

Index funds are pooled investments that passively aim to replicate the returns of market indexes.

An index fund is a mutual fund or ETF that seeks to replicate the performance of an index, often by constructing its portfolio to mirror that of the index itself. Index investing is considered a passive strategy since it does not involve stock picking or active management. Studies show that over time, indexing strategies tend to perform better than stock-picking strategies. Because they are passive, index funds also tend to have lower fees and tax exposure.4 [...] "Indexing" is a form of passive fund management. Instead of a fund portfolio manager actively stock picking and market timing—that is, choosing securities to invest in and strategizing when to buy and sell them—the fund manager builds a portfolio wherein the holdings mirror the securities of a particular index. The idea is that by mimicking the profile of the index—the stock market as a whole, or a broad segment of it—the fund will match its performance as well. [...] \ Some of the most important indices in the U.S. markets are the S&P 500 and the Dow Jones Industrial Average. \ Passive index investing has become a popular low-cost way to replicate the returns of popular indices such as the S&P 500 Index or Dow Jones Industrial Average. \ Benchmarking your investment strategy against the appropriate index is key to understanding a portfolio's performance. The S&P 500, which tracks the performance of 500 large-cap U.S. companies, is an example of an index.

Indexing is an investment approach that seeks to track the performance of a specific benchmark, or index. Instead of trying to pick individual winning stocks, indexes hold all—or a representative sample—of the securities in the index that’s being tracked. Investing in funds that track these indexes is sometimes referred to as “passive investing.” Five key benefits of indexing Indexed products, including mutual funds and exchange-traded funds (ETFs), boast a range of advantages for investors: 1. [...] Conclusion Index funds provide notable benefits for investors: Investing in low-cost index funds that track a market segment with relative performance predictability can help investors achieve their goals, with approximately $500 billion of costs saved since 2000 in the form of lower expense ratios for index fund investors. Misperceptions about the growth of index fund investing should not distract from this fact. [...] 2. Low costs. Index funds boast a powerful advantage when it comes to keeping costs low for investors. They often have lower expense ratios, as they cost less to manage and operate, given that they don’t require large investment teams to analyze and select securities. Index funds use a buy-and-hold approach, which promotes lower transaction costs. The securities within index funds are generally subject to less turnover than those in funds directed by active managers; this reduces the brokerage

## Index investing lets you put money into the largest U.S. companies with low fees and minimal risk. Elizabeth GravierEditor, CNBC Select Share Investing can seem intimidating: What if you make a bad choice and lose money? or what about a lack of access to quality investing advice? At the end of the day, however, that fear can be holding you back from really growing your net worth. [...] The good news is there are many easy ways to invest; you don’t have to worry about picking individual stocks, and hiring an expensive advisor isn’t always necessary. One of the easiest ways to get started investing is through index funds. ## What we’ll cover How index funds work Index investing is a form of passive investing Index investing with a brokerage account FAQs ## Compare investing resources This interactive feature is provided and powered by Bankrate. [...] Because the goal of index funds is to mirror the same holdings of whatever index they track, they are naturally diversified and thus hold a lower risk than individual stock holdings. Market indexes tend to have a good track record, too. Though the S&P 500 certainly fluctuates, it has historically generated nearly a 10% average annual return over time for investors. (Just remember that future returns are not guaranteed.) ## Index investing is a form of passive investing

An index fund is a type of investment that tracks the performance of a specific benchmark like the S&P 500 or the Dow Jones Industrial Average. Instead of picking individual stocks, an index fund tracks the performance of a specific market benchmark—or "index," like the popular S&P 500 Index—as closely as possible. [...] Rather than hand-selecting which stocks or bonds the fund will hold, the fund's manager buys all (or a representative sample) of the stocks or bonds in the index it tracks. By investing in an index fund, you essentially own a small piece of every investment within the index, which helps diversify risk and could lead to long-term growth. An index fund is designed to keep pace with the benchmark, as opposed to an actively managed strategy that seeks to outperform the benchmark. [...] To be clear, "index" is a descriptor that defines the benchmark, while index mutual funds and index ETFs are the actual investment products that seek to match the performance of that benchmark. Both are designed to track a specific market index, but they have distinct differences that can affect your investment strategy. They include: