What is an index fund?
An index fund is a mutual fund or ETF that holds every security in a published index in the same proportions. There is no portfolio manager picking stocks. An S&P 500 index fund holds the 500 largest US companies weighted by market cap. Expense ratios are typically 0.03% to 0.10% (VOO, VTI, FXAIX), versus 0.50% to 1.50% for actively managed funds. The fund’s return equals the index minus the expense ratio and a tiny tracking error.
S&P Dow Jones’ SPIVA US Scorecard consistently finds that over 15-year windows, more than 85% of large-cap active funds underperform the S&P 500. On a $500,000 portfolio, the gap between a 0.03% index fund and a 0.85% active fund is $4,100 a year. Over 30 years at 10% returns, that 0.82% fee gap compounds to roughly $1.4M of foregone wealth on a $500K starting balance.
Owning five overlapping S&P 500 funds across different brokerages. VOO, IVV, SPY, FXAIX, and SWPPX all track the same 500 stocks. Pick one broad fund (or a total-market fund like VTI) and move on.
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