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What is an index fund?

Enjoy the benefits of broad diversification, tax efficiency, and low costs with index mutual funds and ETFs.

Definition of an index fund

An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or "index," like the popular S&P 500 Index—as closely as possible. That's why you may hear people refer to indexing as a "passive" investment strategy.

Instead of hand-selecting which stocks or bonds the fund will hold, the fund's manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.

Built-in benefits of index funds

Lower risk through broader diversification

Each index fund contains a preselected collection of hundreds or thousands of stocks, bonds, or sometimes both. If a single stock or bond in the collection is performing poorly, there's a good chance that another is performing well, which helps minimize your losses.

On the other hand, when you buy individual stocks and bonds, if one goes south, your savings could take a much bigger hit in a short period.

Lower taxes

Index funds don't change their stock or bond holdings as often as actively managed funds. This often results in fewer taxable capital gains distributions from the fund, which could reduce your tax bill.

Lower costs

All index funds have professional portfolio managers. What they don't have is the need to pay more for the expertise and time it takes to hand-select stocks or bonds for each fund

Not all index funds are created equal

We started the indexing revolution

We introduced index funds to individual investors almost 45 years ago and have been the voice of indexing ever since.

Our funds—like our company—are intentionally designed to make sure that when new economies of scale help us lower costs, those benefits are passed directly to you.

Low minimums + low costs = a win-win for you

Enjoy access to more than 40 Admiral™ Shares index mutual funds for a minimum of just $3,000 each.

Or get started with index ETFs for the price of 1 share, which typically ranges from about $50 to a few hundred dollars.

The broadest diversification with just 4 index funds

When used in combination, these total market funds cover nearly all U.S. and international stock and bond markets. This can help reduce your overall investment risk while making it easier to manage your portfolio.

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Choose from more than 100 Vanguard index funds that track indexes across nearly all U.S. and international stock and bond markets, as well as sector-specific areas of the markets.

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Market benchmark

An unmanaged group of bonds or stocks whose overall performance is used as a standard to measure investment performance.

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Could actively managed funds help you beat the market?

Consider what's happened over the past 15 years1—only about 11% of active stock fund managers and 14% of active bond fund managers have outperformed their designated benchmarks.

When you're trying to track the markets and not beat them, you can worry less about how accurate your predictions may be.

Active stock fund managers

  • 11% outperformed benchmarks.
  • 89% underperformed benchmarks.

Active bond fund managers

  • 14% outperformed benchmarks.
  • 86% underperformed benchmarks.

footnote1Sources: Vanguard calculations, using data from Morningstar, Inc. Based on funds' excess returns relative to their prospectus benchmark for the 15-year period ending December 31, 2017.

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Asset allocation

The way an investment portfolio is divided among the broader asset classes of stocks, bonds, and short-term reserves. Also known as "asset mix."

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ETF (exchange-traded fund)

ETFs—like mutual funds—are broadly diversified collections of individual stocks or bonds.

But while mutual funds are only priced at the end of each trading day, ETFs have real-time prices that change throughout the trading day.

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A strategy intended to lower your chances of losing money on your investments.

Diversification can be achieved in many ways, including spreading your investments across:

  • Multiple asset classes, by buying a combination of stocks, bonds, and cash.
  • Multiple holdings, by buying many bonds and stocks (which you can do through a single ETF or mutual fund) instead of only 1 or a few.
  • Multiple geographic regions, by buying a combination of U.S. and international investments.
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Total market fund

An ETF or mutual fund that invests in U.S. or international bond or stock markets at the broadest level.

"Total bond" funds invest in a combination of short-, intermediate-, and long-term bonds with varying degrees of credit quality and risk.

"Total stock" funds invest in a combination of small, mid-size, and large companies with varying degrees of value (meaning they focus on paying dividends) and growth (meaning they focus on increasing the price of their stock).

They typically do this by following an indexing strategy—choosing a broad market index that tracks the entire bond or stock market and investing in all or a representative sample of the bonds or stocks in that index.

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After you have your asset allocation

Consider breaking down your bond and stock allocations into U.S. and international investments to further diversify your portfolio.

We recommend you split your stock allocation to about:

  • 60% U.S. stocks.
  • 40% international stocks.

We also recommend you split your bond allocation to about:

  • 70% U.S. bonds.
  • 30% international bonds.