What is an index fund?

An index fund, or a passively managed funds,  is a type of fund designed to track the performance of a particular market as closely as possible.

The aim is to replicate the performance of that market, while keeping costs as low as possible, by setting the fund on ‘autopilot’, and reducing the need for expensive fund managers.

One of the pioneers, and best-known names in supplying index funds is Vanguard.  But lots of other companies, such as Blackrock iShares, and State Street, offer similar fund options.

Index funds in Ireland

Thousands of index funds are available to the Irish investor by using Moneycube.

Among the most popular choices are funds which track the US S&P 500, which track European stocks, or which track the FTSE 100 list of the largest companies in the UK.  By investing in a handful of index fund like these, you can expose your money to a huge range of global companies.

Beyond that, there are index funds which track all sorts of markets, from global stocks and shares, to government and company bonds.  It’s also possible to invest in index funds which track specific sectors such as healthcare, energy or technology.  And there are index funds focused on individual countries and regions, from Japan to the US, to emerging markets and the Eurozone.

The move to passive investing

Index funds are a major form of passive investing – that is, minimising the cost and effort of investing by buying and selling investments infrequently, and holding investments for the long term.

In recent years, passive investing has become much more popular.

The central belief behind index funds is that over time, actively managed funds can never beat the index itself.  Over the long term, the cost of paying the fund manager will weigh on the fund’s returns, dragging it below the performance of the index itself.

Should I invest in index funds?

In Ireland, there are still merits to using active management for many investors.  But the move towards passive investing is driving down costs, and increasing returns, for all investors.

Read on: Ready-made fund choices