The Index Fund Revolution

Index funds are simple, low-cost ways to gain exposure to markets. They’re most commonly available as mutual funds and exchange traded funds (ETFs). While stocks, bonds, commodities and real estate have been around for centuries, index funds have revolutionized how investors access these assets and build portfolios to seek outcomes that matter most to them.

How index funds have
revolutionized investing

The growth of ETFs and index mutual funds has transformed investing, setting a new market standard. Watch this video of Martin Small, head of U.S. iShares, “bridging” the connection between electric guitars and index investing as revolutionary vehicles of change.

Why index funds?

Efficient access

Efficient access

There’s an index, and an index fund, for almost every market and investment strategy you can think of. More choice gives investors a lot of flexibility to build for the
goals they want.

Low cost

Low cost

When you combine the impact of lower fees and tax efficiency, the potential savings gained by using an index fund can really add up. Index ETFs and mutual funds cost about 1/3rd as much as typical
active mutual funds.1

Competitive performance

Competitive performance

Index funds generally aim to match rather than beat their benchmarks, minus costs. Only 18% of active mutual funds outperformed their benchmarks over the past five years.2

What to know about index funds

Round out your knowledge of indexing, ETFs and index mutual funds.

  • Indexing has democratized investing.

    Institutional investors were the first adopters of index funds, more than four decades ago. Individuals quickly followed suit, thanks to the funds’ low cost, diversification and simplicity.

  • Indexes come in all shapes and sizes – including those that track the same market.

    For example, indexes that track U.S. dividend-paying companies can have different rules on stock selection, leading to vastly different results.

  • Index funds can offer access to many of the same outcomes that actively managed funds do.

    Technology has made it possible to index strategies that were once only the province of active managers, such as smart beta ETFs that isolate factors like value, growth and low volatility.

  • Cost is only one consideration in choosing a fund.

    While the annual expense ratio matters, you should make choices based on what’s important to you, be it tax efficiency, tracking error or types of companies in the index.

  • Index funds are professionally managed.

    There’s a lot of work that gets done behind the scenes by skilled portfolio managers to help their funds deliver what they say “on the label.”

Index funds are still a small portion of
stock and bond markets

Index funds have plenty of room to grow. They represent just 10% of global stocks and bonds and about a third of managed assets overall.

Room to grow

Index funds have plenty of room to grow.

Source: BlackRock estimates based on McKinsey, Markit, Bloomberg, Simfund and Broadridge data as of 12/31/16.

How to invest in index funds

The two most common types of index funds are exchange traded funds (ETFs) and index mutual funds. While they’re similar in many ways, there are a few key differences to consider.

ETFsIndex mutual funds
Portfolio construction Professionally managed pool of securities that seeks to track a rules-based index. Professionally managed pool of securities that seeks to track a rules-based index.
Buying and selling On an exchange, like a stock Directly with the fund provider
Share pricing Market price set throughout the day, while exchange is open Net asset value (NAV) set once a day, after market close

For more information on the differences between ETFs and mutual funds, click here.