An index fund is a type of mutual fund that tracks the performance of an index, most commonly one that is a measure of the stock market or major index like the Dow Jones Industrial Average or S&P 500. The most prevalent type of index fund tracks the S&P 500, which is consider the best proxy for the broad stock market. A mutual fund is a pooled investment vehicle that allows an investor to gain exposure to a diversified group of securities without needing the capital to buy each individually.
Investing in Index Funds
While an investor interested in a mutual fund has access to many types, the index fund has emerged as one of the most popular. This popularity is largely based on research that shows that an investment in the stock market is likely to perform well over time, while actively managed funds typically lag in overall return. An investor looking to track the overall performance of the stock market without a mutual fund would have to own a proportional number of shares in each stock. Investing in an index fund solves this problem by pooling capital into an investment vehicle and providing a basket of stocks instead.
Furthermore few mutual funds will have a lower expense ratio than an index fund. Index fund managers need only structure their fund to replicate the performance of their targeted stock market index. Other actively managed funds have higher management expense ratios due to more complex strategies and maintenance. This equates to more savings and positive returns for the index fund investor.
Best Index Funds for Investors
There are a wide range of different types of index funds that investors can use to incorporate into their portfolios. Investors can track major U.S. stock indices like the Dow Jones Industrial Average, S&P 500 and the Nasdaq Composite Index. However, there are also sub-sectors and different asset classes like commodities or currency that investors can look to as well. Index funds provide investors with a lower cost and easier-to-understand option when making their investing decisions.