Index funds are a type of mutual fund or exchange-traded fund (ETF) that aim to replicate the performance of a specific market index, like the S&P 500. One major benefit is their low cost; for example, if an index fund charges a 0.2% expense ratio, you keep 99.8% of your investment returns. Over time, this can save you thousands compared to higher-fee active funds. Additionally, index funds offer built-in diversification, as they include many different stocks within the index. For instance, if you invest $10,000 in an index fund tracking the S&P 500, you're effectively investing in 500 different companies, reducing your risk if one company performs poorly.

The expense ratio is the annual fee that mutual funds or ETFs charge their shareholders, expressed as a percentage of the fund's average net assets. It covers management fees, administrative costs, and other expenses related to the fund's operations. A lower expense ratio means more of your money goes toward your investment rather than fees.