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Intro to Index Funds

https://www.chase.com/personal/investments/learning-and-insights/article/what-is-an-index-fund

https://www.investor.gov/introduction-investing/investing-basics/glossary/market-indices

Index funds track the performance of a specific group of stocks that represent a particular market or economic sector. A good mental image is a "basket" of stocks that represent a group of companies that are a good sampling of a particular industry.

The technical term for this basket of stocks is a market index.

Index funds don't attempt to beat the market in terms of performance, but they attempt to mimic the return performance of the market index. A common type of index fund is a S&P 500 index fund that tracks a selection of the top 500 companies that make up the S&P 500.

Index funds by nature are diversified since each fund has a wide mix of stocks and other securities, and they're relatively easy to passively track and manage.

There are two major types of index funds: ETFs (Exchange Traded Funds) and Mutual Funds. ETFs trade like stocks do throughout a market day, while mutual funds are only bought & sold at a set price once a day. There are a lot of subtypes of index funds, however.

Subtypes

  • Stock funds
    • Tracks a specific stock market index, like the S&P 500 or Dow Jones Industrial Average. They invest in either all or some of the companies that make up the index to mimic its performance. Stock funds that track indexes like the S&P 500 are good "first assets" for investing due to their general stability. 
  • Bond funds
    • Like stock funds, but for bonds. They track indexes like the Bloomberg US Aggregate Bond Index, and these funds tend to include government, corporate, or municipal bonds depending on the tracked index.
  • International funds
    • Also like stock & bond funds, but for foreign indexes like the Nikkei 225 (Japan), FTSE 100 (United Kingdom), and DAX (Germany). They let you diversify by having your eggs in foreign baskets, but they're also subject to the fickle nature of foreign exchange rates and global events.
  • Sector specific funds
    • These are index funds that track baskets of stocks that represent industries like tech, health, real estate, etc. Tech examples include the NASDAQ-100 Technology Sector Index and the S&P Technology Sector Index.

Pros & Cons

Pros
  • Since index funds are passively managed, this usually corresponds with lower management fees versus more actively managed funds.
    • They're great "intro to investing" stocks because they're largely hands off investments: an investor typically only has to do occasional research and make occasional decisions
  • Index funds naturally spread your investment across a range of assets, so there's built-in diversification.
  • Consistent performance over time: they're designed to match a market index's performance, not beat it, so they're more focused on long-term investment and return
Cons
  • Limited flexibility: index funds are always attached to a specific group of assets and it takes a lot to add or remove an asset from an index. It's common to never see a change in an index's holdings.
  • Potential for lower returns: since they're not trying to beat the market, they may not perform well versus actively managed funds and they may not reap the rewards of strong markets as much as actively managed funds
  • Usual risks of investment: say you have an index fund tracking tech stocks and the industry takes a nosedive, that index fund is likely hella pwned
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