What is indexing

Indexing is a way of gaining exposure to an investment market. Most investment markets have indexes that measure their value over time. For example, a share index measures the change in value of the shares of the companies included in the index. Indexes cover almost every industry sector and asset class, including Australian and international shares, property, bonds and cash.

Index managers like Vanguard, don't try to outperform the market. Rather, they invest in all or a representative sample of the securities in the index and let markets do their work over the long term. By adopting a 'buy and hold' approach the cost of investing can be significantly reduced over time and lead to better returns for investors in the long term, especially on an after-tax basis. Because index funds invest in all or most of the securities in an index, they provide diversification, which means lower risk.