Glossary / Markets

Index fund

An index fund is a fund that holds the constituents of a published index in their published weights rather than selecting them, which removes manager judgement and most of the cost that comes with it.

The result tracks the index minus fees and tracking difference. It will never beat the market and, net of costs, that is the point.

An ETF is an index fund that trades on an exchange. The wrapper differs; the underlying idea does not.

Where people get it wrong

Assuming all funds tracking the same index are equivalent. Domicile, replication method and withholding tax treatment can differ by more than the fee.

The framework behind it The three fund portfolio, and why it breaks for expatriates sets out the rule, the arithmetic and where it breaks.

Read the framework

Related terms

Expense ratio The expense ratio is the annual percentage of assets a fund deducts to cover its running costs, charged continuously and reflected in the fund's price rather than billed separately. Fund domicile A fund's domicile is the country in which it is legally established, and it determines the withholding tax the fund suffers on its holdings and the estate tax exposure of the person who owns it. Accumulating versus distributing An accumulating fund reinvests its dividends inside the fund while a distributing fund pays them out to the holder, which changes the tax treatment and the administration but not the underlying holdings.

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