3 Reasons to Invest in Index Funds

Index funds are considered one of the smartest types of investments, and for good reason.

By Adam Levy – Updated Nov 14, 2025 at 11:31 AM | Fact-checked by Margo Winton Parodi

Key Points

Index funds provide instant diversification by tracking market indexes like the S&P 500.
With low expense ratios and minimal turnover, index funds reduce management costs and taxes.
Historically, index funds offer attractive returns, outperforming most actively managed funds.

An index fund is a type of mutual fund or exchange-traded fund (ETF). It's a bundle of securities that collectively track the performance of a market index such as the S&P 500 (^GSPC +0.80%). An index fund often contains the same investments in approximately the same proportion as the index the fund tracks. The index itself is usually focused on a specific sector, geography, or stock exchange.

Investing in index funds has long been considered one of the smartest investment moves you can make. Index funds are affordable, enable diversification, and tend to generate attractive returns over time. Historically, index funds outperform other types of funds that are actively managed by top investment firms.

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Graphic of a stock chart. — Image source: Getty Images.

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.