How do index funds differ from actively managed mutual funds?

Index funds passively track a market index, like the S&P 500, by holding the same securities in the same proportions as that index. They require minimal human decision-making, which keeps costs low. Expense ratios for index funds are typically a fraction of a percent annually. Actively managed mutual funds employ portfolio managers who research and select investments, trying to outperform the market. This hands-on approach results in higher fees, often one to two percent or more annually. Research consistently shows that most actively managed funds fail to beat their benchmark index over the long term, partly because those higher fees eat into returns. As a result, index funds have grown enormously popular among investors seeking broad market exposure at low cost.