Question 1

What are index funds, in the simplest terms?

Accepted Answer

Index funds are funds that aim to match an index by holding the same investments, or a close version of them.

Question 2

Do index funds pay dividends?

Accepted Answer

Many stock index funds pay dividends because the companies inside them pay dividends. Bond index funds pay interest from the bonds they hold.

Question 3

Index fund vs ETF: what is the difference?

Accepted Answer

An index fund is a strategy. An ETF is a wrapper. Many ETF index funds are index funds that trade during the day on an exchange.

Question 4

Index fund vs mutual fund: what is the difference?

Accepted Answer

A mutual fund is a wrapper. Mutual fund index funds are index funds packaged inside a mutual fund, priced once per day at NAV.

Question 5

Are index funds safe?

Accepted Answer

Index funds can drop when markets drop, so “safe” depends on the time horizon and the index tracked. Broad stock market index funds carry market risk. Bond index funds usually swing less, yet they still carry interest rate risk.

Question 6

How much money do I need to start?

Accepted Answer

Index fund minimum investment depends on the fund and platform. Some mutual funds have minimums. ETFs often let you start with the price of one share, and some brokers offer fractional shares.

Question 7

What is tracking error?

Accepted Answer

Index fund tracking error is the difference between the index’s result and the fund’s result, caused by fees, trading, and portfolio mechanics.

Index Funds Explained

Index Funds Explained: Why Most People Start Here