Index Fund

What is an index fund?

An index fund is a fund that copies a market index (a list of companies, like the FTSE 100 or S&P 500). Instead of paying someone to pick investments, the fund just buys everything in the index.

Index funds are also called tracker funds because they track an index. Same thing, different name.

Why use an index fund?

Most fund managers who try to beat the market fail over the long term. Index funds don’t try to beat it. They just match it. And they charge less for doing so.

How much does an index fund cost?

Index funds charge a yearly fee called an OCF (Ongoing Charges Figure). Typical fees are 0.03% to 0.20%. That’s 30p to £2 a year for every £1,000 invested.

Index fund vs ETF

An ETF can be an index fund. The terms describe different things.

“Index fund” means it tracks an index. “ETF” means it trades on a stock exchange. Many ETFs are index funds. Some index funds are not ETFs.

When people say “index fund” they often mean an OEIC that tracks an index. OEICs have one price per day and are easier to set up for monthly investing.

Key points about index funds

• Tracks a market index. No one picking stocks
• Also called a tracker fund. Same thing
• Low fees, often under 0.20% a year
• Can be an ETF or an OEIC. Different ways to buy the same thing