LONG-TERM INVESTINGalso: tracker fundalso: passive fund

Index fund

An index fund holds the constituents of a published index in their stated proportions rather than selecting them, aiming to match that index's return minus costs — not to beat it.

Because there is no research team choosing holdings, ongoing charges are typically a small fraction of those on actively managed funds. Over long periods that cost difference compounds directly against the investor.

What an index fund does not protect you from

A tracker delivers whatever the index delivers, including the declines. Holding one does not reduce market risk, does not diversify beyond whatever the index actually contains — many headline indices are heavily concentrated in their largest constituents — and offers no protection whatsoever against selling it at the wrong moment.

The most common failure with index funds is not choosing the wrong one. It is not holding the one you chose.

Related terms

ETFAn exchange-traded fund is a fund whose shares trade on an exchange throughout the day like a stock. Most track an index, but the structure itself says nothing about what the fund holds or how risky it is.DiversificationDiversification is holding assets whose returns do not move together, so that a poor outcome in one is not a poor outcome in all — it reduces the impact of being wrong about any single holding, and does not reduce the risk of being wrong about the market as a whole.Asset allocationAsset allocation is the decision about what proportion of a portfolio sits in each broad asset class — equities, bonds, cash, and others — and it accounts for far more of a portfolio's variability over time than the selection of individual holdings within those classes.

Maintained by Jared Sinclair, Founder · Syrax Global FZCO · Definitions are educational, not financial advice.

Knowing the vocabulary is the easy part.

Every term here can be learned in an afternoon. Applying them consistently under pressure is the part that decides outcomes — and the part almost nobody measures. That is what the series is about.

One click unsubscribes for good. We never sell or share your address.

Or score your own discipline first Create a free account