Index fund

An index fund is a mutual fund or an ETF that tries to match the returns of a market index. A mutual fund also pools money from many investors.

A market index measures a group of stocks or bonds that stands for part of a market. The S&P 500 is one example. You cannot buy an index itself, but an index fund lets you follow one.

Index funds usually buy and sell less often than other funds. They do not pay people to pick investments, so their costs can be lower.

Why it matters

Fees and expenses reduce your return. If two funds hold investments that do equally well, the one with lower costs generally gives you more. Not every index fund is cheaper, so check the cost first. An index fund carries the same risks as the market it follows, and fees can make it return a little less than its index.

A worked example

Two funds follow the same index, and each earns 7% in a year before fees. One charges 0.1% a year, and the other charges 1%. On $10,000, the first leaves you $690, and the second leaves you $600.