What Is an Index Fund?

By Matthew Frankel, CFP – Updated Nov 9, 2025 at 11:24 PM

Key Points

Index funds mimic specific benchmarks, suitable for long-term, diversified investment strategies.
S&P 500 index funds have historically returned 10.2% annually since 1965, aiding wealth creation.
Low fees in index funds, like Vanguard's 0.03% for S&P 500 ETF, make them cost-effective.

Index fund investing has become far more popular recently, as many investors have started to recognize their long-term wealth-building potential and are wary of picking individual stocks. In this article, we'll discuss what an index fund is, how it works, whether you should buy index funds, and offer a few examples of popular index funds you might want to put on your radar.

An infographic explaining the pros and cons of investing in index funds. — Image source: The Motley Fool

What is an index fund?

An index fund is a type of investment vehicle that is designed to track a certain benchmark index. For example, an S&P 500 index fund aims to match the long-term total returns of the S&P 500. A Russell 2000 ETF aims to match the performance of the Russell 2000 index.

There are index funds that track broad-based stock market indexes, as well as sector-specific and narrowly focused indexes. For example, there are index funds that can be used to invest in the financial sector or in artificial intelligence stocks, just to name a couple of examples.

Index funds can come in the forms of both exchange-traded funds (ETFs) and mutual funds. Index funds are also referred to as passive funds, meaning that the fund's managers don't choose investments -- they simply try to replicate an index. This contrasts with actively managed funds, where managers choose investments with the goal of delivering superior performance over time. In short, an actively managed fund aims to beat the index, while an index fund simply aims to match the index.

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Are index funds right for you?

Index funds can be solid investments for individuals of all experience levels and investment styles. If you don't have the time, knowledge, and desire to research and invest in individual stocks, index funds can be a great way to create a diversified investment portfolio that requires little attention or maintenance.

On the other hand, even if you have a portfolio of individual stocks that you believe can beat the market over time, index funds can form a backbone to your portfolio that can give you peace of mind and reduce your company-specific risk.

Top examples of real-world index funds

There are hundreds, if not thousands, of index funds you can invest in. But just to name a few, here are some of the most popular examples:

Vanguard S&P 500 ETF: an ultra-cheap index fund that aims to track the long-term performance of the S&P 500 benchmark index.
Invesco QQQ Trust (QQQ -0.85%): This tracks the tech-heavy Nasdaq-100 index. This fund is so popular that you might hear someone describe the Nasdaq's performance by referencing "QQQ."
Schwab High Dividend ETF (SCHD -0.88%): an index fund that focuses on stocks with above-average dividend yields.
Vanguard Russell 2000 ETF (VTWO -2.02%): The Russell 2000 is the most popular benchmark index for small-cap stocks, and this is a low-cost index fund that tracks its performance.

About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Matt Frankel has positions in Vanguard Russell 2000 ETF and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.