An index fund is a mutual fund or ETF built to copy a published index rather than beat it. Its manager buys the index's securities in the index's proportions and trades mainly when the index changes, so costs stay low and the fund's return lands close to the index's, minus expenses. S&P Dow Jones Indices' SPIVA scorecards, which compare active funds with their benchmarks, help explain the appeal: most active stock funds fall short, and the longer the period, the more of them do. The catch is that an index fund takes its market's losses in full. The stocks hub gathers the wider investing basics.
How does an index fund work?
An index fund buys the securities in its target index in the proportions the index uses, so its value rises and falls with that index.
The index provider makes the decisions. S&P Dow Jones Indices chooses the S&P 500's members and their weights, as what is the S&P 500 explains, and every fund tracking it follows those choices. The fund's own work is mechanical: invest new money across the holdings, collect and pass on dividends, and trade when the provider adds, drops or reweights a company.
Funds take one of two approaches. Full replication means owning every member at its index weight; Vanguard says its 500 Index Fund attempts to replicate the index by holding substantially all of its stocks in approximately index proportions. Representative sampling means holding a portfolio whose characteristics, such as sector weights and company sizes, match the index without necessarily owning every security. iShares describes IVV this way, though it also aims to hold all or substantially all of the index's components at roughly their index weights. Sampling matters more for bond and international indexes, where some securities are hard to buy.
Because trading follows the index, turnover is low. Vanguard's 500 Index Fund turned over 2% of its average portfolio in its latest fiscal year and IVV 3%, which keeps transaction costs and taxable gains down. Both may also hold index futures so that cash from dividends or new purchases stays invested in the market.
What is the difference between cap-weighted and equal-weighted indexes?
A cap-weighted index sizes each company by its market value, while an equal-weighted index gives every member the same slice at each rebalance.
Most broad stock indexes, including the S&P 500, weight members by float-adjusted market value, so the largest companies dominate. NVIDIA alone made up 8.4% of Vanguard's S&P 500 ETF on September 30, 2026. The S&P 500 Equal Weight Index holds the same companies but resets them to identical weights every quarter. Invesco's RSP, which tracks it, counted 504 constituents on June 30, 2026, ranging from $5.2 billion to $4.8 trillion in market value.
Worked example: What a 50% fall in the largest stock would cost $10,000 in each kind of S&P 500 fund
- Cap-weighted fund: 8.4% of $10,000 = $840 in NVIDIA. If the stock halved and nothing else moved, the fund would lose $420, or 4.2%.
- Equal-weighted fund, just after a rebalance: $10,000 ÷ 504 = about $19.84 in NVIDIA. The same fall would cost about $9.92, or 0.1%.
- The trade-off runs the other way when big companies lead. Over the 10 years to December 31, 2025, the S&P 500 returned 14.82% a year and its equal-weight version 11.71%, so $10,000 grew to about $39,827 against $30,264.
- In 2025 alone the gap was 17.88% against 11.43%.
Leadership does change: in the first half of 2026, RSP returned 12.03% while IVV returned 10.19%. Equal weighting carries its own costs, though. RSP charges 0.20% a year against 0.03% for IVV, its quarterly resets produced 27% turnover, and it trailed its own index by 0.25 percentage points a year over the 10 years to 2025. It also swung harder in the 2020 crash, losing 26.63% in the first quarter against 19.60% for IVV.
What does SPIVA say about active funds versus index funds?
SPIVA shows most actively managed US stock funds trail their benchmark, and the share is highest over long periods: 92.89% of large-cap funds over 20 years to 2025.
S&P Dow Jones Indices has published the SPIVA (S&P Indices Versus Active) scorecard since 2002. Each active fund is measured against its category's benchmark, after fees but before sales loads, and funds that merged or closed during a period stay in the count, so the results are not flattered by looking only at survivors. The benchmark is the index itself with nothing deducted, so a low-cost index fund would also have trailed it slightly.
| Active fund category | Benchmark | 1 year | 5 years | 10 years | 20 years |
|---|---|---|---|---|---|
| All large-cap funds | S&P 500 | 78.78% | 88.96% | 85.59% | 92.89% |
| All mid-cap funds | S&P MidCap 400 | 55.41% | 72.32% | 81.14% | 89.74% |
| All small-cap funds | S&P SmallCap 600 | 40.65% | 62.67% | 75.95% | 90.28% |
| All domestic equity funds | S&P Composite 1500 | 79.83% | 91.47% | 90.43% | 95.01% |
The percentages are the share of funds that underperformed over periods ended December 31, 2025, from SPIVA U.S. Year-End 2025.
The year 2025 was the fourth-worst for large-cap managers in the scorecard's 25-year history, as the largest stocks kept leading. Mid- and small-cap managers fared better over one year, partly because they could tilt toward bigger companies, but over 20 years all four rows sit near or above 90%. S&P's mid-year 2026 update, covering periods to June 30, put the large-cap figure at 67.18% for the first half of 2026 and 92.61% over 20 years.
Worked example: How closed funds change the 20-year SPIVA result for large-cap funds
- Funds in the category at the start of the 20 years to December 31, 2025: 760
- Still operating at the end: 34.61%, or about 263; the rest were merged or liquidated
- Counted as underperformers: 92.89%, or about 706, leaving about 54 funds that survived and beat the S&P 500
- Share of survivors that won: 54 ÷ 263 = about 20.5%
- Share of the starting group that won: 54 ÷ 760 = about 7.1%, or roughly one fund in 14
The second figure is the one that mattered to someone choosing a fund 20 years ago, because nobody knew in advance which funds would close.
SPIVA does not prove that index funds will always come out ahead, and past patterns can change. What it documents is how hard it has been to pick, in advance, the minority of active funds that go on to outperform.
How do you compare two index funds that track the same market?
Check five things in order: the index itself, the expense ratio, the measured tracking difference, any securities lending and the fund's size and trading costs.
Confirm the index
S&P 500, total US market and equal-weight S&P 500 funds own different mixes, so their returns diverge even at identical fees. The prospectus names the index, and the fund's website lists the holdings.
Compare expense ratios
The fee is the most predictable part of the gap. Invesco's equal-weight ETF charges 0.20%, while Vanguard's S&P 500 ETF charges 0.03%; on $50,000, that is $100 a year against $15 before any growth.
Check the tracking difference
Subtract the index return from the fund's NAV return over five or ten years. VOO trailed the S&P 500 by 0.04 percentage points a year over the 10 years to September 30, 2026, close to its fee, while RSP trailed its index by 0.25 points a year over the 10 years to 2025, more than its 0.20% fee.
Read the securities lending terms
Many index funds lend holdings to borrowers who post collateral and pay fees, which can offset part of the fund's costs. IVV may lend up to one-third of its assets and keeps 81% of the lending income under its current agreement, with the rest paid to BlackRock as lending agent. In the year to March 31, 2026 its share came to $16.5 million, about 0.002% of its $720 billion of net assets; Vanguard's 500 Index Fund earned $10.0 million in 2025 on $1.48 trillion. The prospectus risk is that a borrower fails to return the shares or the collateral loses value.
Look at size and trading costs
For ETFs, larger and busier funds usually have tighter bid-ask spreads. IVV's 30-day median spread was 0.01% on October 30, 2026, and SPY's 0.00% a day earlier. For index mutual funds, check the opening minimum and any account fees instead.
Worked example: What a 0.37-point yearly gap costs on $50,000 over 25 years
Assume the S&P 500 returns 7% a year, an illustration rather than a forecast. One fund trails it by VOO's 10-year gap of 0.04 points; the other trails by 0.41 points, the average expense ratio of S&P 500 index funds at the end of 2025 in Lipper data cited by Vanguard.
- Fund trailing by 0.04 points: $50,000 × 1.0696²⁵ = about $268,847
- Fund trailing by 0.41 points: $50,000 × 1.0659²⁵ = about $246,537
- Difference: about $22,310, for owning the same 500 companies
SPY vs VOO vs IVV runs these checks on the three largest S&P 500 ETFs, while the wrapper's effect on taxes and minimums is the subject of ETFs vs mutual funds vs index funds.
What are the risks of index funds?
An index fund carries the full risk of its market, because it will not sell ahead of a downturn or move into cash.
- Market losses. Vanguard's 500 Index Fund Admiral Shares lost 19.61% in the first quarter of 2020 and 18.15% in calendar 2022. The IVV prospectus says the fund does not attempt to take defensive positions under any market conditions, including declining markets. Bear markets and corrections covers how deep and long past declines have been.
- Concentration. Cap weighting lets a few companies and one sector dominate: information technology was 39.7% of VOO on September 30, 2026, and Vanguard warns its fund could become nondiversified solely by tracking its index.
- Index errors. If the provider makes a mistake, Vanguard's prospectus says the resulting gains, losses or costs will generally be borne by the fund and its shareholders.
- Overlap. Owning several funds can mean owning the same companies twice, because S&P 500, total market and Nasdaq-100 funds share many of their largest holdings.
- Inflation. A fund that matches its index can still lose purchasing power when stocks lag rising prices; real returns and inflation shows how to measure that.
Vanguard's prospectus also notes that an investment in the fund is not a bank deposit and is not insured or guaranteed by the FDIC. Types of investment risk sets these risks alongside liquidity, credit and the rest.
Where do index funds fit in a long-term plan?
Index funds are commonly used as core holdings in retirement and brokerage accounts, with the split between stock and bond funds set by goals and time horizon.
That split matters more than the choice between two near-identical S&P 500 funds. Asset allocation by age covers common approaches to it, and target-date funds package several index funds into one portfolio that grows more conservative over time. Low costs leave more of the market's return to compound; the compound interest calculator shows how regular contributions could add up at a rate you choose, and how compound interest works explains why the years matter more than the starting sum. Price histories for two widely held index ETFs are on the SPY and QQQ pages.