What is an index fund, really?
You probably own an index fund. Do you know what's inside?
The S&P 500 holds about 500 of America's largest companies, sized by the market: the bigger the company, the bigger its share of your money. Winners grow, losers shrink out, new companies get added. You never have to guess which one wins.
That's why, at the end of 2023, U.S. index funds held more money than actively managed funds for the first time (Morningstar).
Companies named are examples, not recommendations. Education, not advice. Not a recommendation to buy or sell anything.
Transcript
A lot of people invest in index funds, but they don't even understand what it is. What is an index fund? It basically has the top 500 companies in America.
They are ranked by their strength, meaning the biggest company has the biggest weight. So, let's say currently Nvidia, Apple, Microsoft, these are like at the top. And the smallest company will be, a very small portion, fraction of a percentage.
Basically you allow the market to decide how much of your money gets invested in what company. What that allows for is you do not have to worry about what company is going to do well in the future. It is going to go bankrupt, which new one is going to, get built and grow.
It kind of has this built-in self-cleansing mechanism. So, there is a very good reason why index funds are so popular right now.
Sources
- Largest S&P 500 weights in Oct 2026: Nvidia, Apple, Microsoft (Slickcharts, Oct 10, 2026; SPDR S&P 500 ETF holdings, Oct 2, 2026)
- Passive U.S. funds passed active funds in total assets at the end of 2023 (Morningstar data, reported by the Financial Times, Jan 2024; summary: https://www.hl.co.uk/news/passive-eclipses-active-in-us-fund-market-as-assets-swell-to-133tn)
- Buffett, 2013 Berkshire Hathaway letter ("A low-cost S&P 500 index fund will achieve this goal"): https://www.berkshirehathaway.com/letters/2013ltr.pdf