Index Funds
Rules-based funds that track a market rather than trying to beat it.
Indexing removes one decision but not every decision
An index fund follows a defined set of rules instead of asking a portfolio manager to choose securities based on forecasts.
That can reduce manager-selection risk and often lowers costs, but the index itself still makes consequential choices. It determines which securities qualify, how they are weighted, when the portfolio changes and how concentrated the fund can become.
A market-cap-weighted index can become heavily exposed to the largest companies even though the investor never made an explicit decision to concentrate there.
What to compare
Start with the index, not the fund name. Compare coverage, weighting method, concentration, expense ratio and tracking. Two funds described as "large-cap," "total market" or "international" can produce meaningfully different portfolios.
Common mistakes
- ×Buying a narrow sector index believing it is broad-market exposure
- ×Switching funds after a weak year and locking in the gap
- ×Ignoring which account type the fund is held in
- ×Paying an advisory layer on top of a fund chosen for its low cost