How does index funds work?
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Traditionally, when you invest in a fund, there are some people who manage it and decide what to invest in. These people are expensive, and take a portion of any investment income you earn from the fund.
In the 70’s, Vanguard (an investment company) got the idea to just follow a really simple algorithm for deciding investments like, “buy a bit of every company on the S&P 500.” This is obviously a way cheaper fund to run and costs way less in fees for the investor. Since they typically track different stock market indices, these types of funds have been termed index funds.
Even better, index funds often outperform the actively managed ones. You often get better returns and lower fees.
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