Reference no: EM133062611

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Index funds are investments built to track the performance of a market index. This means that they include a number of investments and tend to be diversified in securities across that index. Index funds include both index mutual funds and index exchange-traded funds (ETFs) and typically use a passive investing strategy. However, index funds usually deliver returns that are slightly lower than an index fund due to the fees from these funds and are exposed to the same risks as the index they're following. For example, if the S&P 500 declines in value, then the index funds which tracks it will follow. But along with risks, there are some benefits that come with index funds. The primary benefit to index funds is the lower expense ratio, which is the ongoing cost of investing in the fund compared to the costs of actively managed funds. Having an actively managed strategy, as opposed to a passive investing strategy, means that an investor frequently buys and sells investments. For reference, suppose an investor purchases two funds that both grow 7% per year over the next 30 years. An actively managed fund would have an expense ratio of 1.2% , but the index fund would have an expense ratio of 0.2%.

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