--- title: "What Is an Index Fund, and What Is the S&P 500?" description: "Index funds reshaped how ordinary people invest — by giving up on beating the market and simply matching it. Here's what they are, what the S&P 500 actually is, and why the evidence behind passive investing has proved so stubborn." category: "Markets" category_url: https://boursel.com/category/markets author: "Hannah Blackwood" published: 2026-06-26T18:30:00.000Z updated: 2026-06-26T18:30:00.000Z canonical: https://boursel.com/article/what-is-an-index-fund-and-what-is-the-s-p-500 tags: ["index-funds", "s-and-p-500", "passive-investing", "etfs", "investing"] --- # What Is an Index Fund, and What Is the S&P 500? Index funds reshaped how ordinary people invest — by giving up on beating the market and simply matching it. Here's what they are, what the S&P 500 actually is, and why the evidence behind passive investing has proved so stubborn. *This is general information, not investment advice.* The most popular investment of the past half-century works by not trying to be clever. Here's why that matters. ## What a market index is A **market index** is a measurement — a snapshot of how a slice of the market is doing. The **S&P 500**, run by S&P Dow Jones Indices, tracks about 500 large US companies; the Dow tracks 30; the Nasdaq Composite skews to tech. An index isn't something you can buy — it's a yardstick. What you can buy is a fund that copies it. ## How the S&P 500 works The S&P 500 is **market-cap weighted**: each company's slice is proportional to its total market value (share price × shares outstanding). So the biggest companies dominate — the ten largest constituents account for roughly **38%** of the index's value, [per S&P data](https://www.spglobal.com/spdji/en/spiva/article/spiva-us-year-end-2024/). Membership isn't automatic: an S&P committee reviews candidates against rules on size, US domicile, liquidity and recent profitability. ## What an index fund is An **index fund** is a mutual fund or ETF that holds the same securities as an index, in the same proportions, aiming to **match** its return rather than beat it — "passive" investing. The opposite is **active** management, where a manager researches and picks stocks trying to outperform a benchmark. ## The record: passive vs. active The case for index funds rests on a blunt fact: most active managers fail to beat their benchmark, and the longer the horizon, the worse it looks. S&P's **SPIVA** scorecard found **84.3% of active large-cap US funds underperformed the S&P 500 over the 10 years** ending 2024 — and over **15 years, zero of 22** US equity fund categories had a majority of active managers beating their benchmark, [per S&P Dow Jones Indices](https://www.spglobal.com/spdji/en/spiva/article/spiva-us-year-end-2024/). ## Why index funds won: fees The engine of the argument is cost — every dollar in fees is a dollar that doesn't compound. The average active equity mutual fund charged **0.64%** in 2024, versus **0.05%** for the average index fund, [per the Investment Company Institute](https://www.ici.org/system/files/2025-03/per31-01.pdf). Compounded over decades, that gap erodes a meaningful chunk of returns. It was the insight behind **Jack Bogle's** first index fund for ordinary investors, launched at Vanguard in **1976** — dismissed at the time as "Bogle's folly," it raised just $11 million and went on to become one of the largest funds in the world. ## ETFs vs. index mutual funds Both can track the same index. **Index mutual funds** price once daily at net asset value; **ETFs** trade all day on an exchange like a stock and are often more tax-efficient (see our ETF explainer). The practical differences for a long-term holder are usually modest. ## The risks Index funds aren't magic. They give you the market's **losses** too — track the S&P 500 down 30% and your fund falls about 30%, with no manager playing defense. Market-cap weighting **concentrates risk** in the biggest names (today, a handful of megacap tech stocks). And critics raise governance questions as passive funds own ever-larger stakes across corporate America. ## What it means For most investors without a genuine edge, a low-cost index fund offers broad market exposure cheaply — a benchmark the data show is hard to beat after fees. Many advisers treat one as the core of a portfolio, often paired with a bond index fund, and built up over time through dollar-cost averaging (see our explainer). The proposition is simple: capture the market's long-run return at minimal cost, and don't bet on outguessing it. ## Sources - [SPIVA U.S. Year-End 2024 Scorecard](https://www.spglobal.com/spdji/en/spiva/article/spiva-us-year-end-2024/) - [Trends in the Expenses and Fees of Funds, 2024](https://www.ici.org/system/files/2025-03/per31-01.pdf)