Vanguard Indexing White Paper

The Case for Indexing

An index is a theoretical “basket” of securities designed to represent a broad market or a portion of the market. By reflecting the performance of a particular market, an index provides investors with a benchmark for that market’s performance. Because indexes are, by definition, intended to mirror the market, they are constructed to be marketcapitalization-weighted. An indexed investment strategy such as an index mutual fund or an index-based exchange-traded fund (ETF) seeks to track the performance of an index by assembling a portfolio that invests in the same group of securities, or a sampling of the securities, that compose the index. By investing in a product designed to replicate the performance of a broad market such as the U.S. stock market, an investor can participate, at low cost, in the aggregate performance of that market at all times. By the same token, investing in products designed to replicate the performance of indexes with a narrower focus, such as European stocks or long-term bonds, allows an investor to participate in the purest exposure to a specific market segment within a low-cost framework. As a result of these features, indexing has gained in popularity over time. Estimates of index fund assets, including ETFs, are as high as $1.614 trillion, or 13.2% of the total assets managed by registered investment companies. Continue Reading