Index Funds

An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the S&P 500 Index. 

These funds follow their benchmark index regardless of the state of the markets.

Index funds are generally considered ideal core portfolio holdings for retirement accounts, such as individual retirement accounts (IRAs) and 401(k) accounts.

Index funds seek to match the risk and return of the market based on the theory that in the long term, the market will outperform any single investment.

• Low Cost - Index Funds are less expensive than their actively managed counterparts because they are replicating the performance of a benchmark index, rather than manually researching and selecting the holdings.

• Diversification - Index Funds provide diversification because they are tracking the broad markets as a whole, which are typically hundreds or thousands of stocks.

• Efficiency - Managers of index funds trade holdings less often, incurring fewer transaction fees and commissions.

• Passive - Index Funds replicate the benchmark market, which allows them to add or remove holdings over time. This allows investors to purchase the index fund, and hold it for long periods of time without having to keep up with the fund or each holding.

• Market Risk - Index Funds replicate the benchmark market, which leaves them vulnerable to a market swing or crash.

• Control - Index Funds determine which holdings to add and remove based on the underlying index, regardless of the quality or prospects of the holding.

• Concentration - While Index Funds are diversified among a large number of holdings, they are typically weighted by market cap, which means the larger the company, the larger % of the fund they are, unlike funds that equally weigh each holding.