What Is Index Fund?

An index fund is a type of investment fund -- either a mutual fund or an ETF -- that is designed to match the performance of a specific market index, such as the S&P 500, the total stock market, or the Bloomberg Aggregate Bond Index. Instead of a fund manager picking stocks, the fund simply holds every stock (or a representative sample) in the target index.

Because index funds do not require active stock-picking, they have extremely low expense ratios -- often 0.03% to 0.10% per year. That means for every $10,000 invested, you pay just $3 to $10 annually in fees, compared to $50 to $150 for a typical actively managed fund.

Warren Buffett has repeatedly recommended index funds for most investors. In his 2013 letter to Berkshire Hathaway shareholders, he instructed that 90% of his estate be invested in a low-cost S&P 500 index fund. The logic is simple: most professional money managers fail to beat the index over long periods, and the ones who do are nearly impossible to identify in advance.