Glossary · Funds and derivatives
Index fund
An index fund is a fund that copies a stock market index, such as the S&P 500: it owns every company on the list, in the same proportions, for a small fee.
Also called: index tracker, passive fund, tracker fund, S&P 500 index fund
With dividends reinvested, before fees, to Oct 2026: 11.8% a year. Price alone: $74,760.
Index and active funds together, Q2 2026.
In plain words
Imagine a cookbook that lists 500 ingredients and exactly how much of each to use. You could pick the ingredients you like and hope for the best, or just follow the recipe. An index fund follows the recipe. The recipe is a stock index, a list of companies such as the S&P 500, and the fund buys every company on it, in the same proportions.
Nobody at an index fund tries to guess which stocks will win. When a company joins the index, the fund buys it; when one leaves, the fund sells it. Because there is no stock picking and little trading, index funds are cheap: the biggest charge a few hundredths of a percent a year.
Your result is the index’s result minus that small fee. That sounds modest, but most fund managers who try to beat the index fail to do so over long periods, mainly because their fees are higher.
Example
The same market, two kinds of fund
Say the stock market returns 7% a year before costs, and you put in $10,000 for 30 years.
- An index fund charging 0.05% a year gives you about 6.95% a year: $75,000 after 30 years.
- An active fund charging 1% a year, whose manager exactly matches the market before fees, gives you 6%: $57,400.
- To end up level with the index fund, the manager would have to beat the market by about 0.95% a year, every year, for 30 years.
Same market, same years: the gap of about $17,600 is the fee, compounded.
One level deeper
The first index funds were built for pension funds in the early 1970s. In August 1976 John Bogle’s Vanguard opened the first one for ordinary savers, tracking the S&P 500. Critics called it “Bogle’s folly” and it raised only about $11 million at first; index funds now hold trillions of dollars.
Most big indexes are weighted by market capitalization, so an S&P 500 fund puts the most money into the largest companies. The index provider decides who is in and out; the fund just follows, usually within a few hundredths of a percent a year (the gap is called tracking error).
An index fund can be a classic mutual fund, bought from the fund company once a day, or an ETF that trades on the exchange all day. The idea behind both is passive investing: accept the market’s return instead of trying to beat it.
$1,000 in the S&P 500 since the first index fund for savers
What $1,000 grew to from August 1976, with every dividend reinvested. A real index fund would have ended a little lower, by its fee. The dips are the crashes of 1987, 2000–02 and 2008, and the brief one in 2020: an index fund falls with the market.
The numbers behind the chart
| Date | $1,000 in the S&P 500, dividends reinvested |
|---|---|
| Aug 1976 | $1,000 |
| Dec 1980 | $1,596 |
| Dec 1990 | $5,885 |
| Dec 2000 | $29.7K |
| Dec 2010 | $33.4K |
| Dec 2020 | $121K |
| Dec 2022 | $132K |
| Dec 2023 | $161K |
| Dec 2024 | $209K |
| Dec 2025 | $241K |
| Oct 2026 | $274K |
Why it matters
Index funds made it cheap for anyone to own a whole market, which is the simplest way to get diversification.
Fees compound like returns do: a fund that charges 1% a year instead of 0.05% can cost a quarter of the final result over 30 years. See expense ratio.
So much money now follows indexes that being added to the S&P 500 can move a company’s share price on its own.
A common mistake
Myth: An index fund is safe because it owns hundreds of companies.
In fact: It removes the risk of one company going bust, not the risk of the whole market falling. An S&P 500 index fund lost about half its value between 2007 and 2009, just like the index.
Questions people ask
Index fund or ETF: what is the difference?
An ETF is a way of packaging a fund so it trades on the exchange all day; an index fund is a fund that follows an index. Most ETFs are index funds, and many index funds are not ETFs but mutual funds bought at the day’s closing price.
How much does an index fund cost?
The biggest S&P 500 index funds charge about 0.02% to 0.10% a year: $2 to $10 on every $10,000. Actively managed stock funds often charge 0.5% to 1% or more.
Do index funds beat actively managed funds?
Usually, over long periods. S&P Dow Jones Indices’ SPIVA reports find that most actively managed US stock funds trail their benchmark index over 10 to 15 years, largely because of higher fees. Some active funds do win, but it is hard to know which ones in advance.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US corporate equities by holder (Z.1): Board of Governors of the Federal Reserve System, Financial Accounts of the United States (Z.1), table F51.1.s Corporate equities and table S1M.e.b.
- S&P Composite price and total return since 1871, and US consumer prices: Robert J. Shiller, Online Data (shillerdata.com); total return with dividends reinvested monthly, calculated by BigCapital.
- The chart is the index itself, monthly averages of daily prices, with dividends reinvested. A real fund trails it by its fee and small trading costs.
- This page explains a term. It is not investment advice.