Index investing
 
Introduction
  
  Indexing (tracking) is an investment approach that seeks to match the investment returns of a specified market benchmark, or index. When indexing, an investment manager holds all or in the case of some large indexes, a representative sample of the securities in the target index.

An index (tracker) fund makes no attempt to use traditional active money management or to bet on individual stocks or narrow industry sectors in an attempt to outpace the index. Thus, indexing is a "passive" investment approach emphasizing portfolio diversification and low portfolio trading activity.

  
  Indexing's cost advantage  
  One of the key advantages of index funds is their low costs. Because they track a target benchmark rather than constantly buy and sell securities in an attempt to outperform the market index funds generally have lower advisory fees, operating expenses, and trading costs than actively managed funds.

  
  Benefits to investors  
  Index funds provide broad diversification because they hold all (or a representative sample) of the securities in their target benchmarks. While this diversification does not protect against market downswings, it does reduce the impact of a dramatic decline of any one specific stock or industry sector.

 
  A long-term strategy  
  Indexing gains its advantage over the long term, so this strategy should attract investors who seek a competitive long-term investment return through broadly diversified portfolios. Such investors find that indexing provides a high degree of relative predictability in an uncertain stock market. Nothing ensures absolute returns, of course, but index investors can feel confident that their investment should not dramatically underperform other funds investing in the same type of securities. Therefore, over the long term, index funds should provide competitive performance relative to actively managed funds.

 
  Risks of index funds  
  Because they are designed to provide returns that closely track their benchmarks, index funds carry all the risks normally associated with the type of asset the fund holds. When the overall stock market falls, investors can expect the price of shares in a stock index fund to fall too. In short, an index fund does not reduce market risk the chance that the overall market will decline. Indexing's aim is returns that do not stray far from the returns of the benchmark index that the fund tracks.

 
  Vanguard's indexing advantage  
  In 1975, The Vanguard Group was one of the first companies to offer index funds, and today is one of the largest managers of indexed assets in the world. We manage more than $500 billion* in indexed assets, tracking many different segments of the global equity and fixed-income markets. Vanguard index funds offer such distinct advantages as: Experienced management teams. Rigorous investment processes. Value-added trading techniques.


  
  A word about actively managed funds  
  Of course, there will always be actively managed funds that outpace index funds over long periods. It may be luck—pure chance dictates that some investment managers will provide exceptional returns over lengthy winning streaks. Or it may be skill—investment managers with outstanding abilities may earn superior returns over time. The problem in selecting actively managed funds is identifying in advance those that will be consistently superior over time.

 
 
 
 
 
 
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