What is an index fund?
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.
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.
An unmanaged group of bonds or stocks whose overall performance is used as a standard to measure investment performance.
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.
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.
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, you benefit.
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.
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.
Broad 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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For more information about Vanguard mutual funds and ETFs, visit Vanguard mutual fund prospectuses or Vanguard ETF prospectuses to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Fluctuations in the financial markets and other factors may cause declines in the value of your account.
Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.
This page is for general guidance only and does not take into consideration your personal circumstances or other factors that may be important in making investment decisions. We recommend that you consult a financial or tax advisor about your individual situation before investing.
Vanguard is investor-owned, meaning the fund shareholders own the funds, which in turn own Vanguard.