The most obvious advantage of index funds is that in terms of total return, they have consistently outperformed other forms of products.
One of the main reasons is that, because they are passively managed, they have substantially lower management fees than other funds. The index fund's portfolio simply replicates that of its specified index, rather than having a manager actively trading and a research staff researching stocks and making recommendations.
Index funds have lower transaction costs because they hold investments until the index changes (which doesn't happen very often). Lower costs can have a significant impact on your profits, especially over time.
Buffett noted in his 2014 shareholder letter, "Huge institutional investors, as a group, have long underperformed the naïve index-fund investor who simply sits tight for decades." "Fees have been a big factor: many institutions pay large sums to consultants, who then recommend high-fee managers. And it's a fool's errand." 2
Furthermore, index funds earn less taxable income that must be passed on to their owners because they trade in and out of securities less frequently than actively managed funds.
Another benefit of index funds is that they are tax-deferred. When investors put money into the fund, they acquire new lots of securities in the index, so they may have hundreds or thousands of lots to pick from when selling a given investment. This implies they'll be able to sell the lots with the smallest capital gains and, as a result, the smallest tax bill.
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