Index Fund

An index fund replicates a market index with minimal costs. Discover why they are the foundation of the boglehead strategy and how to track them with Index Balance.

Definition

An index fund is an investment fund whose objective is to replicate the performance of a specific market index, such as the MSCI World, S&P 500, or MSCI Emerging Markets. Rather than having managers trying to select the best stocks (active management), the fund simply buys all or a representative sample of the stocks in the index, in the same proportion.

This passive management strategy has two fundamental advantages: very low costs (TER typically between 0.05% and 0.30% annually) and results that historically outperform the majority of actively managed funds over the long term. Studies such as SPIVA show that more than 85% of active funds fail to beat their benchmark index over 15-year periods.

In many European countries, UCITS index funds offer a tax advantage over ETFs: transfers between funds within the same platform are tax-deferred until the final redemption, allowing rebalancing without triggering a taxable event.

Practical example

The iShares Dev World Index (IE) S Acc EUR fund replicates the MSCI World, which contains approximately 1,400 companies from 23 developed countries. If you invest €1,000, you are buying a small share of each of those companies proportional to their market capitalisation. Its TER is 0.12% per year.