Index Funds

An index fund is a fund designed to match the performance of a market index, such as the S&P 500, rather than try to beat it. Instead of a manager picking stocks, the fund simply holds the same companies as the index in the same proportions. This passive approach keeps costs very low.

Long-term investors use index funds as a simple, low-cost way to own the broad market and capture its average return. Because fees are minimal and they require no stock-picking, they suit hands-off investors and retirement accounts. The main trade-off is that you will match the market, never beat it, but most active funds fail to beat it anyway.

If the S&P 500 rises 9 percent in a year, an S&P 500 index fund aims to return close to 9 percent minus a tiny fee. A 0.04 percent expense ratio means just 40 cents per year on every 1,000 dollars invested.