Index fund
What is index fund?
An index fund is built to match the return of a benchmark, such as the S&P 500, rather than to beat it. It typically achieves this at a far lower cost than a fund trying to pick winners.
- Written by
- Suggested Investments Research Team
- Content type
- Reference definition
- Published
- 2026-09-13
- Last reviewed
- 2026-09-13
Tracking rather than selecting
The fund holds the securities in its target index in roughly the same proportions and trades only when the index itself changes, which keeps turnover and trading costs low compared with actively managed alternatives.
Cost is the main differentiator between two funds tracking the same index
Two funds tracking the identical index can still deliver different investor outcomes because of differences in expense ratio, tracking accuracy and how efficiently they are run.
It does not eliminate market risk
An index fund still falls when its underlying index falls. It removes the risk of picking the wrong individual company, not the risk of a broad market decline.
A worked example
Two funds both tracking the same index with expense ratios of 0.03% and 0.60% will, all else equal, diverge in an investor's ending balance purely because of that fee gap compounding over time.
The mistake people make
Assuming all funds labelled 'index fund' are interchangeable regardless of their expense ratio or how closely they actually track their benchmark.
How we use it
Index funds are the practical benchmark our education content uses to frame what individual-stock research needs to overcome, informed by long-run active-versus-index evidence.
Related terms
Sources and methodology
- SPIVA U.S. Scorecard — S&P Dow Jones IndicesPrimary source
- Investor.gov investor education — U.S. Securities and Exchange CommissionPrimary source
Keep reading
- Investing Glossary
Every investing term we use, defined once and in plain English — from compounding and drawdown to Form 13F and share dilution.
- Compound interest
Compound interest is growth earned on both your original money and on the growth it has already produced. It is the reason long holding periods matter more th
- Dollar-cost averaging
Dollar-cost averaging means investing a fixed amount on a fixed schedule regardless of price. It removes the need to decide when to invest, and it buys more s
- Free cash flow
Free cash flow is the cash a business has left after paying the costs of running and maintaining itself. It is the cash that can fund dividends, buybacks, deb
- Expense ratio
An expense ratio is the annual percentage of your money a fund keeps to run itself. It is deducted from returns quietly, every year, whether the fund performs
- Maximum drawdown
Maximum drawdown is the largest peak-to-trough fall an investment has suffered over a period. It measures the worst stretch an investor would have had to sit
Educational information only. Nothing here is a recommendation to buy or sell any investment, and no research measurement removes the risk of loss.