Many investors have put their money into funds designed to match the performance of a stock market index such as the S&P 500. The advantages:
Market participation. When the broad stock market goes up, you know that your S&P 500 index fund will, too. You won’t have your money in a fund relying on tech stocks when all the gains are coming from banking or health care.
Low costs. Most funds pay their managers to go all over the world, evaluating companies in which they might invest. Index funds don’t have such expenses because the manager merely holds the stocks in a given index. (In some index funds, a sample of the companies is bought, to replicate the performance of the broad index.)
As a result, index funds tend to be much less expensive than actively-managed funds. Over a period of many years, this cost advantage may be very meaningful to investors.
Low turnover. Index funds tend to buy and hold the stocks in the index, until a change is made in the underlying index. Therefore, relatively little trading is done. Long-term, buy-and-hold strategies have outperformed active trading so this patience may be a virtue. Moreover, low turnover may mean fewer trading gains to be passed through to investors and lower annual tax bills.
