What Is an Index Fund and Why Do Experts Love Them?

Warren Buffett has publicly stated that when he dies, he's instructed his estate to put 90% of his wife's inheritance into a simple S&P 500 index fund. This isn't a quirky personal preference — it reflects decades of evidence that index funds outperform the vast majority of professional stock pickers over the long term. Here's why.

What Is an Index Fund?

An index fund is a type of investment fund that tracks a market index — a list of stocks representing a specific market segment. The S&P 500 index, for example, includes the 500 largest publicly traded US companies. An S&P 500 index fund simply buys all 500 stocks in the same proportions as the index. No stock-picking, no active management.

Index Fund vs Actively Managed Fund

• Index fund: mirrors the market, expense ratio 0.03–0.20%, no manager decisions
• Actively managed fund: manager tries to beat the market, expense ratio 0.5–1.5%+, frequent trading
• Over 15 years, about 92% of actively managed US funds underperform their benchmark index
• The fee difference alone explains much of this: 1% annual fee on $100,000 costs $28,000 over 20 years in lost returns

The Most Popular Index Funds

• VOO (Vanguard S&P 500 ETF): tracks S&P 500, 0.03% expense ratio
• VTI (Vanguard Total Stock Market ETF): entire US market, 0.03% expense ratio
• FXAIX (Fidelity 500 Index Fund): S&P 500, 0.015% expense ratio — one of the lowest-cost options available
• VXUS (Vanguard Total International Stock ETF): international exposure outside the US
• BND (Vanguard Total Bond Market ETF): diversified bond exposure for stability

How to Buy Index Funds

Open a brokerage account (Fidelity, Vanguard, Schwab, or any major broker), search for the fund by ticker symbol, and buy shares. Most brokers now offer fractional shares, so you can invest any dollar amount regardless of the share price. For retirement, buy within an IRA or 401(k) for tax advantages.

The Case for Index Funds: A 30-Year Example

The S&P 500 has averaged about 10% annually over the past 30 years (about 7% after inflation). $10,000 invested in 1995 in an S&P 500 index fund would be worth approximately $174,000 in 2025 — with zero active management, zero stock picking, and near-zero fees. The same $10,000 in a typical actively managed fund would be worth roughly $140,000 after fees.

The Only Risk: Staying the Course

Index funds are not risk-free — they drop with the market. The S&P 500 fell 38% in 2008 and 34% in the COVID crash of 2020. Both times it recovered and went on to new highs. The risk isn't the funds themselves — it's investors panic-selling during downturns and locking in losses permanently.