Ask almost any nine-year-old standing at the counter of a Baskin-Robbins ice cream shop, face pressed against the cold glass case with anticipation, just how many flavors she’d really like to sample. No holds barred, she might say, “All of them, please.”
That’s what’s known as a pink-spoon moment: Pure delight from experiencing a little taste of everything without having to commit to just one thing.
It’s also a sentiment shared by many investors who select index funds for their portfolios. As of February, investors held $20.1 trillion in index mutual funds and exchange-traded funds
, or nearly 53% of the U.S. fund market, compared with $18 trillion in actively managed funds, according to the Investment Company Institute.
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Elise Terry, head of U.S. iShares at BlackRock, says index funds have gained widespread adoption because they make investing simpler and more accessible. “Rather than trying to predict which stocks will outperform, investors can gain broad market exposure in a single investment, removing much of the guesswork from investing,” she says.
Index investing for individuals was pioneered by John C. Bogle, who launched the First Index Investment Trust, now known as the Vanguard 500 Index Fund, in 1976. As of December, its Admiral Shares (ticker: VFIAX) held nearly $1.5 trillion in assets.
Here’s what you should know about investing in index funds:
— Common benchmarks for index funds.
— Plain-vanilla indexing and beyond.
— Cost, tax and trading considerations.
— Integrating index funds with active management.
Common Benchmarks for Index Funds
Today, there are a variety of flavors of index investing. Common benchmarks include:
— S&P 500: Tracks large U.S. companies such as Nvidia Corp. (NVDA) and Berkshire Hathaway Inc. (BRK.B).
— Nasdaq-100: Focuses on large non-financial, growth-oriented companies like Apple Inc. (AAPL) and DoorDash Inc. (DASH).
— Russell 3000 Index: Represents about 98% of the U.S. equity market.
— MSCI All Country World Index: Covers 85% of the investable market across 23 developed countries and 24 emerging-market countries.
— Bloomberg U.S. Aggregate Bond Index: Tracks investment-grade U.S. bonds.
Major providers such as Vanguard, BlackRock (iShares), Fidelity and Invesco offer funds tied to these indexes and more.
Plain-Vanilla Indexing and Beyond
While index funds provide broad diversification
, investors still need to be mindful of overlap. It’s like sampling French Vanilla, Vanilla Bean and Homemade Vanilla in one visit: Too much of the same flavor can limit variety and diminish the quality of the experience.
For example, owning funds that track the S&P 500, Russell 3000 and a large-cap growth index can lead to duplicate exposure to companies like Apple, Microsoft Corp. (MSFT) and Amazon.com Inc. (AMZN). It would also mean an unintended concentration in mega-cap technology stocks, paying extra management fees for similar types of investments and diminishing the ability to diversify across other sectors.
One straightforward approach is to start with four core funds covering U.S. stocks, international stocks, U.S. bonds and international bonds. Kathy Kellert, head of index equity product at Vanguard Group, estimates this strategy can “provide exposure to more than 30,000 underlying stocks and bonds, helping investors spread risk across markets and asset classes while keeping costs and complexity low.”
[Read: 7 of the Best Growth Funds to Buy and Hold]
Cost, Tax and Trading Considerations
Cost is one of the biggest advantages of index funds. The average actively managed equity mutual fund charges about 0.64%, compared with roughly 0.05% for index funds, according to the Investment Company Institute.
Even small fee differences can compound significantly over time.
Still, even among index funds, it’s not just about fees, says Terry. “While expense ratios matter, focusing solely on the cheapest option can overlook other important factors such as index methodology, tracking precision, liquidity and trading costs — all of which contribute to the total cost of ownership and overall investor outcomes.”
Structure also matters. ETFs often offer tax advantages because they can limit capital gains distributions, while mutual funds may distribute gains more frequently.
Trading flexibility is another key difference. ETFs trade throughout the day like stocks, while mutual funds are priced once daily. For long-term investors, the difference may not matter much, but it can affect how and when investors enter or exit positions.
Integrating Index Funds With Active Management
The theory behind index investing is rooted in the Efficient Market Hypothesis (EMH) developed by Nobel laureate Eugene Fama in the late 1960s. The Efficient Market Hypothesis suggests markets generally reflect all available information, making it difficult for active managers to consistently outperform their passive peers.
In practice, however, markets are largely efficient, but not always perfectly efficient.
Critics have pointed to periods like the stock market bubble in 2000, the stock market crash in 1987 or periodic valuation anomalies (when active managers have outperformed their benchmarks) to suggest that behavioral biases, not just publicly available information, can also drive asset prices. For example, over the last decade, 52% of actively managed corporate bond funds and 39% of actively managed foreign stock funds outperformed their passive benchmarks, according to Morningstar.
For many investors, this supports a core-and-satellite approach that integrates index funds for the bulk of the core holdings, combined with actively managed funds where it makes sense.
Kellert emphasizes balance: “The key is using indexing to capture broad market returns at low costs, while thoughtfully incorporating active strategies where manager skill and reasonable fees can enhance long-term outcomes.”
Bottom Line
In many ways, index investing offers the same appeal as that Baskin-Robbins counter. Instead of trying to guess which flavor (or investment) has the most appeal, investors can sample a broad swath of the market in a single scoop. With the right mix of low-cost funds and a disciplined strategy, it’s possible to build a portfolio that captures much of what the market has to offer, without the pressure of choosing just one flavor.
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How to Invest in Index Funds originally appeared on usnews.com
Update 04/02/26: This story was published at an earlier date and has been updated with new information.