Free lesson · Lesson 52 in the app
Index Funds: Owning the Whole Market
How one fund can own a whole market, and why it's often the simple choice.
About 8 minutes · 10-question quiz · Ages 10 and up
Learn
What if one purchase could make you part-owner of Tesco, Shell, AstraZeneca and 97 other big companies, all at once?
An index fund lets you do that. In Lesson 19 you met John Bogle, who launched the first one ordinary people could buy, in 1976. Professionals laughed, and his fund became known as "Bogle's Folly".
Nobody's laughing now. Since 2024, index funds in America have held more money than funds run by stock pickers.
The idea is simple. Instead of hunting for winners, an index fund owns the whole list, and it does it cheaply.
What is an index fund?
An index is a list of companies, like the FTSE 100 (Lesson 51). An index fund owns every company on that list.
It doesn't buy equal amounts. Bigger companies get bigger slices, just as they count for more in the index.
Say you put £100 into a fund tracking a tiny index of four companies, worth £50 billion, £30 billion, £15 billion and £5 billion:
- £50 goes into the biggest
- £30 into the next
- £15 and £5 into the smallest two
Your money is spread for you, in the same shape as the index.
How it runs itself
An index fund copies its index and gets the market's result, without trying to beat it. This is called passive investing.
The fund only trades when the index changes. As old industries shrink and new ones grow, companies drop out of the index and others join, and the fund follows automatically. You don't have to do anything.
Nobody is paid to research and pick shares, so it's cheap. Index funds often charge around 0.1% to 0.25% a year, while funds run by stock pickers often charge around 0.75% to 1.5%.
Why index funds usually win
Lesson 46 showed that about 9 in 10 professional stock pickers fall behind an index fund over 15 years. There are three main reasons:
- •Fees come out every year from a growing pot, so even a small gap in fees grows big (Lesson 19).
- •The fund never guesses. It can't panic-sell or chase a hot share, because all it does is hold the list.
- •You never beat the market, but you never fall far behind it either. You get the market's result, minus a small fee.
Even Warren Buffett, the world's most famous stock picker, says most people are best off with a low-cost index fund.
Narrow or wide?
There are index funds for almost any list:
- FTSE 100: the UK's 100 biggest companies
- FTSE All-Share: hundreds of big, medium and small UK companies
- S&P 500: 500 of America's biggest
- Global: thousands of companies across dozens of countries and every industry
The wider the list, the smaller each slice. In a global index fund even a giant company is a small part, so one company's troubles barely register.
The box it comes in doesn't matter much. An index fund can be an everyday fund or an ETF (Lesson 48), and both can track the same index.
What this means for you
You don't need lots of money or hours of research. Many index funds let you start with small amounts, and adding a little each month is easy.
Many long-term investors choose one low-cost global index fund as their first investment. Like any shares fund, it suits money you won't need for at least five years (Lesson 22).
These are general guidelines for learning, not personal advice. Every family's situation is different.
Before Bogle, owning a slice of the whole market took lots of money. Now a young investor can do it with pocket money.
Practice
No marks here. Have a think, or talk it through, then open a model answer.
Your aunt's two funds
Your aunt is choosing between:
Fund A: a manager picks shares to beat the market. Fee 1.2% a year. It beat its index in 3 of the last 10 years.
Fund B: an index fund tracking the FTSE All-Share. Fee 0.1% a year.
Question: What should she weigh up, and which way does the evidence point?
A FTSE 100 fund vs a global index fund:
Rowan's first fund
Rowan is 15. He wants to put £25 a month into his Junior ISA for the long term. He doesn't want to spend hours researching companies.
Question: Which kind of index fund keeps things simplest, and why does it suit him?
Try the quiz
Pick an answer to see if it's right, and why.
Question 1 of 10
What does an index fund do?
Question 2 of 10
Why do index funds usually beat funds run by stock pickers over time?
Question 3 of 10
True or False: Warren Buffett says most ordinary investors are best off with a low-cost index fund.
Question 4 of 10
What is passive investing?
Question 5 of 10
Who launched the first index fund that ordinary people could buy?
Question 6 of 10
True or False: You need thousands of pounds before you can invest in an index fund.
Question 7 of 10
What does an index fund often charge a year?
Question 8 of 10
What is a global index fund?
Question 9 of 10
True or False: An index fund needs you to make frequent trading decisions.
Question 10 of 10
Why might someone choose a FTSE All-Share index fund over a FTSE 100 fund?
10 questions. Nothing is saved, so have a go.
Where a lesson mentions another lesson by number, the free ones are linked. The rest are in the app.
Keep going in the app
In Squids-In, children work through 160 short lessons like this one, in order, alongside a friendly investing game. You can see how they're getting on. It's free while we test it with a small group of families.