Glossary
Index Fund
A fund that passively tracks a market index like the S&P 500, delivering the market's return at very low cost.
An index fund is a mutual fund or ETF that doesn’t try to beat the market — it is the market. Instead of paying managers to pick winners, it mechanically holds every security in a published index (the S&P 500, a total-market index, an international index) in proportion, delivering the index’s return minus a very small fee.
The case for indexing rests on arithmetic, not ideology: all investors collectively earn the market return, so after costs, the average actively managed dollar must underperform the average indexed dollar. Decades of fund data confirm it — most active funds trail their benchmark over long periods, and the winners rarely persist.
What to look at when choosing one: the expense ratio (broad index funds charge a few hundredths of a percent), how closely it tracks its index, and whether the index itself is broad enough to provide real diversification — a total-market or S&P 500 fund holds hundreds to thousands of companies in one purchase.
Index funds are the default engine inside most 401(k) target-date funds and the standard recommendation for long-horizon money. To see what market-rate compounding does over decades, run the numbers in the compound interest calculator.
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