Identification

Equity mutual funds or ETFs hold or invest in stocks. Index equity funds are designed to hold the same stocks and match the performance of a stock index such as the Dow Jones Industrial Average or S&P 500.

History

The Vanguard 500 Index Fund was the first index mutual fund launched in 1976. The fund tracks the S&P 500 index of the 500 largest publicly traded companies in America.

Considerations

Proponents of index fund investing point out that actively managed mutual funds rarely outperform the broader stock market indexes. Equity index funds have much lower expenses and a small turnover of holdings, reducing capital gains taxes.

Effects

The growth of ETFs has broadly expanded the universe of equity index funds. Fund companies now offer hundreds of ETFs that follow narrowly focused indexes such as specific country stock markets or sectors like renewable energy.

Expert Insight

Finance professors Eugene Fama and Kenneth French have done extensive research that shows actively managed funds rarely outperform broad market indexes. They conclude any excess performance by a mutual fund is more a matter of luck than skill.

Source:

Vanguard Funds: Index 500 Fund

Motley Fool: S&P 500 Index

Fama/French forum: Luck vs. Skill in Mutual Funds