What is an Index Fund?

Index Funds Are Built to Track a Market Index, Such as the S&P 500 or Russell 2000:

Instead of investing in your own hand-picked, diverse group of individual stocks in your long-term portfolio, it might be wise to consider Index Funds. Such funds are built to match or track an entire market index, such as the S&P 500 or Russell 2000, and offer an attractive passive form of investing that is both simple and efficient. Not only do index funds offer broad market exposure, but the passive nature of them reduces portfolio turnover resulting in lower operating expenses. Overall, the most important aspect to understand is that passive index funds tend to outperform the majority of actively managed mutual funds.

Imagine buying all 2,000 small cap stocks in the Russell 2000 and the commission fees that would be associated with it. We’re talking in the tens of thousands of dollars in fees that could mostly be avoided by simply investing in the Russell 2000 index fund. In addition to that, you no longer have to pay a premium (higher operating costs) to enlist a professional fund manager who promises superior returns. As mentioned earlier, most actively managed mutual funds can’t match the returns of index funds, so chances are you’re paying more for a smaller return. The exact statistic varies from year-to-year, but 50-80% of mutual funds fail to beat the market. Keep in mind that investing in an index fund does not necessarily guarantee a positive return. The market will fluctuate – up in a bull market and down in a bear market, but historically, the average return of the S&P 500 is roughly 10% per year.

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