How it works
Instead of picking stocks, an index fund buys the whole index—say all 500 companies in the S&P; 500. Little trading means rock-bottom expense ratios and broad diversification. An ETF is essentially an index fund that trades on an exchange like a stock. John Bogle launched the first retail index fund at Vanguard in 1976.
Why active funds struggle
S&P; Dow Jones Indices' SPIVA scorecard finds that roughly 9 in 10 U.S. large-cap active funds trailed the S&P; 500 over 15 years. The efficient market hypothesis and fees explain much of it. Even a 1% fee gap, compounded over 30 years, eats a big slice of your nest egg.
FAQ
- Can index funds lose money?
- Yes—when the market drops, so does the fund.
- Index fund or ETF?
- They're similar; ETFs trade intraday, mutual funds make automatic investing easy.
Sources reviewed: 2026-10-26
References
- Malkiel, B. G. (2019). A Random Walk Down Wall Street (12th ed.). W. W. Norton.
- Bogle, J. C. (2017). The Little Book of Common Sense Investing (10th anniversary ed.). Wiley.
- S&P Dow Jones Indices. SPIVA U.S. Scorecard.