what are index funds 
indexes and index funds exist for almost any part of the financial market index funds invest in the same assets using the same weights as the target index typically stocks or bonds if you re interested in the stocks of an economic sector or the whole market you can find indexes that aim to gain returns that closely match the benchmark index you want to track index funds use a passive investing strategy trading as little as possible to keep costs low for broad indexes like the s p 500 that would be impractical or expensive to do on your own index funds do the work for you by holding a rep sample of the securities s p 500 index funds the most popular in the u s mimic the moves of the stocks in the s p 500 which covers about 80 of all u s equities by market cap 4the portfolios of index funds only change substantially when their benchmark indexes change if the fund follows a weighted index its managers may periodically rebalance the weights the percentage by market cap and components of their fund s securities to keep matched with the target index besides the s p 500 these funds mirror other major indexes like the nasdaq composite index made up of 3 000 stocks listed on the nasdaq exchange the bloomberg u s aggregate bond index which follows the total u s dollar denominated bond market and the dow jones industrial average djia consisting of 30 large cap companies chosen by the editors of the wall street journal 567index funds provide broad market exposure and diversification across various sectors and asset classes according to their underlying index the broader index funds are often quite good at keeping tracking errors low the difference between the fund s performance and the target index however you ll want to thoroughly review any fund s fees and performance before investing to give an idea of how close the funds should track their targets as of march 2024 fidelity s nasdaq composite index fund fncmx had a 10 year average annual return of 15 16 versus 15 23 for the nasdaq composite a 0 07 difference 8investing in index funds means putting your money not behind the skills of active fund managers but on the prospects for the market or its parts benefits of index fundsthe primary advantage index funds have over their actively managed peers is lower fees so if actively managed funds don t outperform their passive peers more investors are asking why are clients paying fund managers so much more in fees each year using spiva data as a proxy which compares the performance of actively managed funds with certain benchmarks 87 of actively traded funds had underperformed the s p 500 the previous five years from data last published in mid 2023 when you extend that to 15 years it s 92 3a greater public understanding of statistics like these helps explain the growing popularity of passive funds almost all of which are index funds you still have to pay an expense ratio with these funds which is charged as a percentage of the assets under management to pay to advisors and managers and cover transaction fees taxes and accounting costs 9 since the managers of index funds are simply replicating the performance of a benchmark index they don t need research analysts and others to choose stocks timing trades etc they also trade holdings less frequently meaning fewer transaction fees and commissions by contrast actively managed funds have large staffs and conduct trades with more complications and volume driving up the costs as such index funds can charge less than their actively trading peers they often cost about 0 05 or less compared with the higher fees that actively managed funds command typically 0 44 and sometimes higher than 1 00 depending on the assets 1011 what does this fee buy you passively managed funds don t try to beat the market they want to match it here are some more of these funds advantages these funds have many virtues that make them well suited for ordinary long term investors that said the best choice for you active or passive or any fund at all will depend more on your financial goals the investment environment risk tolerance and other specifics about your situation than these general characteristics drawbacks of index fundsamong the critiques of index funds is their inherent lack of flexibility because they are designed to mirror a specific market they decline in value when the market does and they can t pivot away in an unfavorable environment similarly they are also criticized for automatically including all the securities in an index this means they may invest in companies that are overvalued or fundamentally weak leaving aside greater weighting or investments in assets that could be chosen by a fund manager and provide better returns of course this automated strategy has often outperformed active management perhaps in part by holding onto assets that active fund managers have misjudged another disadvantage has to do with what s called market cap weighting which many index funds use companies with higher market capitalizations have a greater influence on the fund s performance in such funds this concentration can lead to being too tied to the fate of a few large companies magnifying your risks if these companies underperform best index funds