Index Funds, Explained: What You’re Buying and What It Costs

The index your fund tracks is a document, and the document has an owner. In 2025, S&P Global’s Indices segment collected $1,206 million in asset-linked fees from the funds tracking its rules. Your expense ratio carries that licence, and it is the only figure in this arrangement disclosed before you invest.

Paying rent on a list you did not write

An index is not a market. It is a rulebook: which securities qualify, how each one is weighted, when the list gets rebuilt. A company writes that rulebook, publishes it, and licenses it to fund sponsors.

The scale of that business is disclosed. Indices segment revenue for 2025 was $1,850 million, per the S&P Global 10-K filed in February 2026. Asset-linked fees supplied $1,206 million of it, or about 65%. That line scales with balances rather than with effort.

So the first thing an index fund buys on your behalf is compliance with somebody else’s document. No portfolio manager picks the holdings. A rule does, and the rule is a commercial product with a price on it.

Copying a list without buying every name on it

Tracking sounds mechanical. Two funds run by the same firm show what it actually involves.

Fidelity Total Market Index Fund follows the Dow Jones U.S. Total Stock Market Index. Its summary prospectus says the fund uses “statistical sampling techniques” to “attempt to replicate the returns” of that index. Total annual operating expenses run 0.015%. Attempt is the operative word.

Sampling means the fund holds a subset chosen to behave like the whole. A subset will not behave identically. The gap between what the fund returned and what the index returned is tracking difference. It is measured over a real period, after the fact.

Tracking error is a separate statistic. It measures how much that gap wobbles from period to period, not how large it was. A fund can lag its index steadily. That is low tracking error and a negative tracking difference at once.

Fees, trading costs and the sampling method all push on tracking difference. Only one of the three is printed on the front page of the prospectus.

Handing 0.64% to a fund for thirty years

Now the arithmetic, and the growth rate has to be declared. The rate used here is the 10-year Treasury constant maturity yield, 4.77% on September 3, 2026. It comes from the Federal Reserve’s H.15 release of the following day. That figure is a labelled risk-free rate, and nothing here forecasts what stocks return.

The wider spread is where the money is. The Investment Company Institute, an industry association, published 2025 asset-weighted averages in March 2026. Index equity mutual funds averaged 0.05%; actively managed equity mutual funds averaged 0.64%. The distance between those two is the whole argument.

Start with $100,000, which is illustrative. Subtract each fee level from that growth rate and compound for thirty years.

Annual fee	Whose figure it is	Balance after 30 years
0.00%	Fidelity ZERO Total Market Index Fund	$404,677
0.015%	Fidelity Total Market Index Fund	$402,942
0.05%	Index equity mutual funds, asset-weighted average	$398,923
0.64%	Actively managed equity mutual funds, asset-weighted average	$336,726

Growth rate: 10-year Treasury constant maturity yield of 4.77%, observation of September 3, 2026, Federal Reserve H.15 released September 4, 2026 – a risk-free rate, not a market expectation. Fund expense ratios from the SEC-filed summary prospectuses dated December 30, 2025 and April 29, 2026. The 0.05% and 0.64% averages are 2025 asset-weighted figures from the Investment Company Institute, an industry association, in ‘Trends in the Expenses and Fees of Funds, 2025,’ published March 2026. The $100,000 starting balance is illustrative.

The zero-fee row reaches $404,677. The 0.64% row reaches $336,726, or $67,951 less. That is 16.8% of the ending balance, accounted for by a difference of sixty-four basis points a year.

Here is the part that keeps the exercise honest. The ending balances are entirely a function of the growth rate. Change 4.77% and every dollar figure in the table moves with it. The 16.8% barely moves at all.

Run the identical table at 2% and the share is 17.2%. At 8% it is 16.3%. Neither of those rates is a forecast; they are arbitrary stress values, chosen only to show that the share does not depend on the growth rate. The ratio between two fee levels is the finding. The balance is scaffolding.

Owning the rulebook is what lets a fee reach 0.00%

Fidelity ZERO Total Market Index Fund reports total annual operating expenses of 0.00%. It does not follow a Dow Jones index. It follows the Fidelity U.S. Total Investable Market Index, built in-house on what the prospectus calls “a rules-based proprietary index methodology.”

Write the rulebook yourself and there is no licence to pay. That is not the sole reason a fee lands at zero. It does delete one line from the cost stack, the same line S&P Global books as revenue.

Each fund above appears as a documented fee level. Inside an index fund, as the first section set out, a published rule has already settled the holdings question.

That leaves the wrapper. A fund is what you hold. An account is where you hold it. That second choice runs on tax rules, and the traditional-versus-Roth decision turns on something else entirely.

The thirty-year figures compound an illustrative $100,000 at a labelled risk-free rate and vary only the expense ratio, so they isolate fee drag and forecast no return; the funds named appear as documented fee levels and none of them is a recommendation to buy, the ratios are quoted from prospectuses on the dates given and can be revised, an index fund carries the full market risk of the index it follows, tracking difference means a fund’s result will not equal that index’s, and in a taxable account distributions and index turnover both change what a holder keeps.