What s an index fund?
An index mutual fund or ETF (exchange-traded fund) follows a specific market benchmark, like the S&P 500 Index, as closely as possible. That’s why people often call indexing a "passive" investment strategy.
Benefits of Vanguard index funds
We introduced index funds to individual investors almost 50 years ago and have been the voice of indexing ever since. Our funds are designed to pass along economies of scale and lower the cost of investing, so you can keep more of your returns.
Holding cash vs investing
Does investing make a difference? Don t just take our word for it. See how $10,000 has historically performed in the market.
Index funds vs. actively managed funds
Index funds are designed to match the performance of a certain market or sector, while active funds employ professional money managers who handpick investments and try to beat market performance. Combining both can help you build a balanced portfolio, giving you the stability of index funds and the potential for higher returns from active management.
Index fund |
Actively managed fund |
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|---|---|---|---|
Goal |
Tries to match the performance of a specific market benchmark (or index ) as closely as possible. |
Tries to outperform its benchmark. |
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| Strategy | Buys all (or a representative sample) of the stocks or bonds in the index it is tracking. | Uses a portfolio manager s research and expertise to hand-select stocks or bonds for the fund. | |
| Risk | Aligns directly to the risks involved with the specific stock or bond market the fund tracks. | Adds the risk that the portfolio manager may underperform its benchmark.
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| Tax efficiency | Usually distributes fewer taxable capital gains because the portfolio manager trades less frequently. | Could have more taxable capital gains because the portfolio manager may trade more often, making it more tax-efficient to hold actively managed funds in IRAs. |
Index fund
Goal
Tries to match the performance of a specific market benchmark (or index ) as closely as possible.
Strategy
Buys all (or a representative sample) of the stocks or bonds in the index it s tracking.
Risk
Aligns directly to the risks involved with the specific stock or bond market the fund tracks.
Tax efficiency
Usually distributes fewer taxable capital gains because the portfolio manager trades less frequently.
Actively managed fund
Goal
Tries to outperform its benchmark.
Strategy
Uses a portfolio manager s research and expertise to hand-select stocks or bonds for the fund.
Risk
Adds the risk that the portfolio manager may underperform its benchmark.
Active management performance history
Tax efficiency
Could have more taxable capital gains because the portfolio manager may trade more often, making it more tax-efficient to hold actively managed funds in IRAs.
Find the right index fund for you
Whether your investment goals are near or far, you can find the right combination of low-cost index mutual funds and ETFs (exchange-traded funds) to suit your needs.
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Need help picking a fund? Learn how to choose the right fund for you
1Vanguard average index ETF and mutual fund expense ratio: 0.05%. Industry average index ETF and mutual fund expense ratio: 0.17%. All averages are asset-weighted. Industry average excludes Vanguard. Sources: Vanguard and Morningstar, Inc., as of December 31, 2024.
2For the 10-year period ended March 31, 2025, 28 of 54 Vanguard bond index funds, 16 of 18 Vanguard balanced index funds, and 142 of 153 Vanguard stock index funds—for a total of 186 of 225 Vanguard index funds—outperformed their Lipper peer-group averages. Results will vary for other time periods. Only index mutual funds and ETFs with a minimum 10-year history were included in the comparison. Source: LSEG Lipper. Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all investments are subject to risks. For the most recent performance, visit our website at visit our website at www.vanguard.com/performance.
For more information about Vanguard mutual funds or Vanguard ETFs, obtain a mutual fund or an ETF 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 online) or through another broker (who may charge commissions). See the Vanguard Brokerage Services Commission and Fee Schedules for limits. 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.
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. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after its target date.
ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider or advisor, as applicable, for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider or advisor's assessment of a company, based on the company's level of involvement in a particular industry or their own ESG criteria, may differ from that of other funds or an investor's assessment of such company. As a result, the companies deemed eligible by the index provider or advisor may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider or advisor's proper identification and analysis of ESG data. The advisor may not be successful in assessing and identifying companies that have or will have a positive impact or support a given position. In some circumstances, companies could ultimately have a negative or no impact or support of a given position.