Indexing and index funds
50 years of index investing
Index funds transformed investing by making diversification at a very low cost accessible to millions of investors.
About indexing
Learn more about what index funds are, the advantages they offer to investors, and how indexing continues to evolve.
- Returns since 1976
- How it works
- Key benefits
- Range of choice
A source of impressive returns
What if you’d put $10,000 in what’s now called Vanguard 500 Index Fund back in 1976?
Thanks to the power of compounding, that investment could have grown to roughly $2.2 million by January 2026, highlighting the transformative potential of index funds over time.
Notes: The chart shows the hypothetical cumulative wealth of an initial $10,000 investment in Vanguard 500 Index Fund Investor Shares from December 1976 through January 2026. Returns are calculated from monthly fund total returns, net of fees. The performance data shown represent past performance, which is not a guarantee of future results. Investment returns and principal value will fluctuate, so investors’ shares, when sold, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. For performance data current to the most recent month-end for Vanguard 500 Index Fund Investor Shares (VFINX), visit our website.
Sources: Vanguard calculations, using data from Morningstar, Inc., as of January 2026.
What is an index fund?
An index fund seeks to track a specific benchmark, like the S&P 500 Index, as closely as possible. Rather than relying on analysts or fund managers to pick the securities they think are going to outperform, an index fund simply aims to consistently deliver benchmark-like returns and transparency about what you’re invested in.
"Don't look for the needle in the haystack. Just buy the haystack!"
John C. Bogle
Vanguard's founder
You can invest in index funds through a mutual fund or ETF structure.
How index funds are built
Essentially, an index is a rules-based bucket of investments designed by an index provider to represent a specific market, segment, or investment idea.
Index provider constructs the index
An index mutual fund or ETF is designed by an asset manager to replicate the performance of a target index.
Asset manager constructs the index fund
How index funds are helping investors
Index funds have transformed investing for more than 50 years by making it easier and more affordable to build a diverse portfolio.
Making it possible for anyone to have a well-diversified portfolio
Directly owning at least one share of each stock in the S&P 500 Index and maintaining market cap proportions would cost around $3.2 million.1
Making saving for retirement and college easier and more affordable
Today, most retirement plans and 529 college savings plans offer index funds or use indexing as a core building block.
That broad adoption has enabled Americans to retain more of their hard-earned money. Our estimate shows that, in the last 25 years alone, investors could have collectively saved an astounding $503 billion in fees.
How much index funds could have saved investors in fees since 2000
Notes: Data for the fee savings chart reflect the difference between the cumulative expense ratio fees paid by investors owning open-end funds and what they would have paid if index funds didn’t exist. Investor savings in the cumulative fee savings chart are calculated as: (asset-weighted expense ratio of actively managed funds multiplied by industry assets) minus (asset-weighted expense ratio of index funds multiplied by industry assets).
Sources: Vanguard calculations as of December 31, 2024, using data from Morningstar, Inc.
1 Vanguard calculations, based on data from Bloomberg, as of November 30, 2025.
Key benefits of indexing
Index funds offer several key benefits that can help build a stronger, more diversified portfolio. Let’s explore what makes them such a powerful option.
Confidence through consistency
Index funds deliver consistent performance by mirroring their benchmark—not trying to beat it. That reliability gives investors a powerful foundation for long-term stability and disciplined asset allocation.
Built-in diversification
Index funds offer smart, scalable risk mitigation. They can spread investment risk across securities and sometimes sectors—minimizing volatility from any single stock or industry.
Lower cost
With minimal overhead and trading, index funds cost less to manage, which means more of the return stays where it belongs—with the investor. Even a fraction of a percentage point on a fund’s overall expenses adds up over time, so keeping costs low is key for investment growth.
Easy to understand
Clear objectives and a simple structure. Index funds are precisely designed to track the performance of a specific index, so investors know exactly what they are investing in.
Tax efficiency
Less trading means fewer taxable events. For investors in taxable accounts, indexing can help preserve gains and minimize erosion from capital gains taxes. It’s a way of controlling costs that you can’t always see—taxes.
Power of low-cost investing
Costs matter and so does the power of compounding. Indexing offers a low-cost investment option (both through lower expense ratios and tax efficiency). Lower fees mean investors keep more of their returns, which compounds over time and helps improve long-term outcomes.
Indexing is a valuable starting point for all investors. While many investors may choose to index their entire portfolio, an allocation to active funds may also be suitable. Especially if the active funds can be accessed at a low cost.
How indexing has evolved
When index fund investing started, there was only one player in town: the S&P 500 Index. For many years, index fund investing was virtually synonymous with tracking what became known as “America’s index,” anchoring millions of portfolios to the benefits of broad diversification, cost efficiency, and precision.
But as markets have matured and investor preferences have shifted, the popularity of indexing has resulted in thousands of benchmarks with distinct security compositions.
This expansion of index strategies enables more precise portfolio construction aligned with investor goals and preferences.
Index fund strategies today offer a mosaic of choices
Notes: The chart depicts the total U.S. assets in U.S. dollars of U.S.-domiciled equity index mutual funds and ETFs, annually from December 31, 1976, to December 31, 2024. Funds are grouped into 12 mutually exclusive categories. The U.S. Total Market category comprises any fund whose primary prospectus benchmark is a total market index, such as the Russell 3000 Index or Wilshire 5000 Index, or any fund that otherwise indicates total market coverage in its fund legal name or prospectus. Funds not in the U.S. Total Market category are U.S. nontotal market funds and comprise the remaining 11 categories. The S&P 500 category comprises any U.S. nontotal market fund whose primary prospectus benchmark is the S&P 500 Index or any fund that otherwise indicates it tracks the S&P 500 Index in its fund legal name or prospectus. Any U.S. nontotal market fund that does not track the S&P 500 Index is categorized according to its Morningstar U.S. category group: Sector equity funds are categorized as U.S. Sector Equity and U.S. equity funds are categorized according to their Morningstar category as one of U.S. Fund Small Value, U.S. Fund Small Growth, U.S. Fund Small Blend, U.S. Fund Mid-Cap Value, U.S. Fund Mid-Cap Growth, U.S. Fund Mid-Cap Blend, U.S. Fund Large Value, U.S. Fund Large Growth, or U.S. Fund Large Blend.
Sources: Vanguard calculations, using data from Morningstar, Inc., and FactSet, as of December 31, 2024.
Building blocks for tailored portfolios
Indexing options include targeting specific sectors, styles, market-capitalization segments, factors, and regions. The shift from a single-fund strategy to index-based building blocks allows individual and institutional investors to construct balanced, low-cost portfolios built on index funds—without losing the diversification and affordability that made index fund investing transformative in the first place.
Learn more
Below you’ll find our latest insights and research on index fund investing.
Notes:
All investing is subject to risk, including the possible loss of the money you invest.
For more information about Vanguard funds and ETFs, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
Bond funds are subject to the risk that an issuer will fail to make payments on time and that bond prices will decline because of rising interest rates or negative perceptions of an issuer's ability to make payments.
Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk.