When it comes to investing, there are countless options. You can pick individual stocks, choose actively managed mutual funds, or even try your hand at real estate. But for many people, especially those who want a simple, cost-effective way to build wealth, index funds stand out as one of the best tools available.

Index funds are mutual funds or exchange-traded funds (ETFs) designed to track the performance of a specific market index, like the S&P 500. Instead of trying to beat the market, index funds simply aim to match it. While that may sound unimpressive at first, the long-term results often speak for themselves. Let’s look at some of the advantages, and a few drawbacks, of index funds.

Five Pros of Index Funds

Here are some of the index funds’ strengths:

Pro #1: Low cost. 

One of the biggest advantages of index funds is their low cost. Since they track an index rather than trying to beat it, fund managers don’t need to spend as much money on research, analysis, or frequent trading. That means you pay a lower expense ratio. Over time, those lower fees can mean thousands, sometimes tens of thousands, of dollars more in your pocket.

Pro #2: Diversification.

With a single investment, an index fund gives you exposure to dozens or even hundreds of companies. That diversification spreads out your risk. If one company in the index has a bad quarter, it has a much smaller impact on your investment than if you owned only that company’s stock. It’s an easy way to avoid putting all your eggs in one basket.

Pro #3: Consistent performance.

Here’s a hard truth: Most actively managed funds fail to beat the market over long periods. And when you factor in higher fees, the gap widens even more. Index funds don’t try to outperform, they aim to match the market. Historically, that approach has actually done better than most active managers.

Pro #4: Simplicity.

Investing can be intimidating, especially if you’re new to it. But index funds are straightforward. You pick an index, invest regularly, and let the market do its work. There’s no need to constantly monitor stock prices, watch business news all day, or guess which companies might take off next.

Pro #5: Tax efficiency.

Because index funds trade less often than actively managed funds, they tend to generate fewer taxable capital gains distributions. That means you could potentially owe less in taxes each year compared to more actively traded funds. This tax efficiency can help your investment grow faster over time.

Three Cons of Index Funds

Index funds are good, but they aren’t perfect. Here are a few weaknesses of index funds:

Con #1: No outperformance potential.

If you dream of “beating the market,” index funds aren’t the way to do it. They’re designed to track the market, not outperform it. That means you’ll never have the thrill of doubling your money in a short period because of one great stock pick (but you also avoid the heartbreak of picking the wrong one).

Con #2: Lack of flexibility within the fund.

Index funds are tied to the stocks in their chosen index. They can’t shift money into safer investments when the market starts to dip. So, when the market goes down, your index fund will go down, too. This is why a long-term mindset is essential when investing in them.

Con #3: Overexposure to large companies.

Most indexes are weighted by market capitalization, meaning larger companies make up a bigger percentage of the index. This can result in a few massive companies, think Apple, Microsoft, or Amazon, having an outsized impact on the fund’s performance. That can be good in boom times, but risky if those giants stumble.

As followers of Christ, we’re called to be wise stewards of the resources God has entrusted to us (Matthew 25:14 to 30). That means we should invest in ways that align with biblical principles: avoiding greed, planning for the future, and making decisions with prayerful wisdom. Index funds can be a helpful tool in this process because they encourage patience, lower unnecessary costs, and help us focus on long-term growth rather than short-term gain. 

When investing, remember that the goal isn’t just to grow your wealth, it’s to grow your impact. Tools like index funds can help you do both.