Index funds are passive investments that are designed to mimic the makeup and performance of an underlying market index, such as the S&P 500, at a reduced fee level. According to the Investment Company Institute (ICI), a Washington, D.C.-based mutual fund industry research group, 36% of households in 2018 who owned mutual funds owned at least one equity (stock) index fund. A total of 497 index funds in 2018 had in aggregate assets more than $3.3 trillion. $156 billion in new assets flowed into index funds in 2018 (according to the ICI factbook), distributed as follows:
- 40% invested in world stock indexes (i.e. FTSE 100–London, Nikkei 225–Tokyo, etc.)
- 37% invested in domestic stock funds (i.e. NYSE Composite, Russell 2000, etc.)
- 23% invested in bond or funds made of hybrid indexes (i.e. world and domestic stock funds)
As index funds remain popular among all mutual fund investors, and have grown in usage within retirement plans, it is important to understand the motivation for investors to make these investments. It is equally important to understand what decision-making framework must exist to select an index fund manager to manage investor’s expectations, balancing returns and risks.