Index Fund

An index fund aims to match a market index’s return rather than beat it, by holding the same stocks in the same weights.

Why investors care

It is the low-cost, low-ego way most long-term investors build wealth.

Using it in practice

Use low-cost index funds as the core of a long-term portfolio. Keep it simple: a broad stock index plus a bond index covers most investors, and the lower the fee, the more of the market’s return you keep.

Example in numbers

In the real market

A family dinner table argument: one sibling buys individual stocks and chats about winners all year; the other quietly puts every paycheque into a low-cost index fund. Over 20 years, the index fund sibling almost certainly ends up ahead — not because their picks were better, but because they never had to be. The index captures the growth of the entire market while the stock-picker must be right repeatedly, pay more in trading costs, and resist the urge to sell at the wrong time. Boring, predictable, and effective.

Where people go wrong

It will never beat the market, but most active managers fail to either, after fees.

Key takeaway

The index fund is the low-ego path to the market’s average return, and over long horizons that average has been excellent. It will never beat the market, but most active managers do not either once fees are counted, and the index fund costs almost nothing. Use low-cost index funds as the core of a long-term portfolio and keep the plan simple — a broad stock index and a bond index cover most investors. Boring, predictable, and effective beats clever and expensive.

Definitions reviewed by the Investing Glossary editorial team.