Tracking, not picking
An index is just a rule-based list — the 500 largest US listed companies, say, weighted by market capitalisation. An index fund buys that list and follows the rule when it changes. There is no manager deciding which company looks cheap.
The consequence is structural: the fund's return is the index's return minus costs, and those costs are small because there is no research team to pay for.
Why cost dominates outcomes
Over a long horizon the fee difference compounds against you just as returns compound for you, and unlike returns it is entirely predictable.
£10,000 growing at 7% for 30 years is about £76,000 at a 0.1% fee and about £64,000 at a 1.0% fee. Same market, same risk — roughly £12,000 of difference from the expense ratio alone.
Index fund vs ETF
- Index fund — priced once daily at NAV, bought directly from the provider
- ETF — trades on an exchange all day at a market price, with a spread
- Both can track the same index at similar total cost
- ETFs suit exchange accounts and intraday flexibility; index funds suit automated monthly contributions
What you are accepting
An index fund guarantees you the market's return, which also means it guarantees you the market's drawdowns in full. It will not sidestep a bear market, and cap-weighted indices concentrate heavily in the largest companies. Passive is not the same as low risk — it is low cost and low decision-making.