---
title: "Index Fund"
url: "https://mahouse.world/glossary/index-fund"
type: "glossary term"
topic: "Funds"
author: "Ihor Vlasov"
reviewed: "2026-09-20"
published: "2026-08-10"
---

# Index Fund

An index fund holds the securities of an index — the S&P 500, a global benchmark, a bond universe — in the index's proportions, earning the market's return less a fee of a few hundredths of a per cent, instead of paying a manager to try to beat the market and usually fail. By 2024 index funds and ETFs held more US equity fund assets than active managers, and their fee compression is the ground wealthtech stands on.

**Also known as:** Index tracker, Passive fund, Tracker fund

## Key facts

- **Used at:** the core of most retail and institutional portfolios; every robo-adviser's model portfolios; pension default funds; as the benchmark that active managers are measured against and, mostly, fail to beat over ten years
- **Binding:** a regulated fund (mutual fund or ETF) with a mandate to track a named index within a tracking-error tolerance
- **Typical fee:** 0.02–0.20% a year; the cheapest broad-market funds charge nothing on the headline and earn on securities lending
- **Typical evidence:** over fifteen-year periods roughly 85–90% of active US large-cap funds underperform the S&P 500 after fees (the S&P SPIVA scorecards); the finding holds in most markets and categories
- **Parties:** the sponsors (Vanguard, BlackRock, State Street, Fidelity and others), the index providers (S&P, MSCI, FTSE Russell) paid licence fees, and the investors

## How an index fund works in practice

The fund receives money, buys the index's constituents in their weights — for a capitalisation-weighted index, more of the largest companies — and holds them, rebalancing when the index changes. There is no analyst deciding what to own; the index decides, and the fund's job is to track it as closely and cheaply as possible. The investor gets the market return: not more, and, after a tiny fee, barely less. The argument for it is arithmetic — the average active manager is the market before fees and below it after — and the evidence has been on its side for fifty years.

The industry consequence is what matters for fintech. A wealth manager charging 1% to allocate a client's money into active funds charging another 1% was competing, from 2010, with a robo-adviser charging 0.25% to allocate into index funds charging 0.1%. The clients moved, the fees fell, and the wealth managers either bought the robo-advisers, built their own, or moved up-market to clients who pay for advice rather than for allocation. Asset managers whose business was active management merged — the consolidation wave of the 2010s — or launched index products of their own at a tenth of the revenue.

Index funds' own risks are structural: concentration (a capitalisation-weighted index holds more of whatever has already gone up), the governance of companies owned by funds that cannot sell, and the question of what happens to price discovery if too much money stops trying to find prices.

## Example

An investor puts $100,000 into a global equity index fund at 0.07% a year in 2004, and her sister puts the same into an actively managed global fund at 1.1%. Both markets return 7.5% a year before fees over twenty years. The index fund grows to about $418,000; the active fund, if its manager matched the market before fees — which the average one does — grows to $346,000. The $72,000 difference is the fee, compounded. If the active manager was in the top quartile and beat the market by a point a year after fees, the sister has $438,000 — and the odds of picking that manager in 2004 were about one in four, falling to one in ten for a manager who would stay there for the whole twenty years.

## Common mistakes

- Paying active fees for a fund that tracks the index with a small deviation — a "closet tracker".
- Reading "passive" as "safe"; an index fund falls with its market.
- Comparing funds on the headline fee and ignoring tracking error and the index's own construction.
- Wealth platforms building a business on index funds' fee compression and charging 1% for the wrapper.
- Assuming the evidence for index funds in US large caps holds equally in every market; it holds in most, less strongly in some.

## Related terms

- [Exchange-Traded Fund](https://mahouse.world/glossary/exchange-traded-fund.md)
- [Robo-Adviser](https://mahouse.world/glossary/robo-adviser.md)
- [Assets Under Management](https://mahouse.world/glossary/assets-under-management.md)
- [WealthTech](https://mahouse.world/glossary/wealthtech.md)
- [Alpha](https://mahouse.world/glossary/alpha.md)
- [Diversification](https://mahouse.world/glossary/diversification.md)

— Ihor Vlasov, M&A FinTech Expert. Last reviewed 2026-09-20. https://mahouse.world/authors/ihor-vlasov