Can you lose money in an index fund?

Let’s face it – when we think of safe investments, you might’ve heard the term index fund come up once or twice. But for some of us newer investors it can be hard to decide if this investment aligns with the goals we are hoping to accomplish or if this is the medium in which we want to start investing. While index funds are generally less volatile than most individual stocks, there is never guaranteed safety in investments. That’s why we set out to prove that while you can lose money in an index fund your losses are more limited than other investments. 

This is promising for most of us. However, this is a more loaded question than we might think. Consider that many of the big banks offer index funds that track just about any market you can think of. So which index fund should you choose? Does it make a difference in your potential to lose money? 

Index Fund Defined

To explain how it is possible to lose money in an index fund, we first need to define what this investment is. You might also see an index fund referred to as a mutual fund. This is because an index fund is actually a type of mutual fund or exchange-traded fund (ETF). The only difference? What makes up this fund. In general, an index fund is a diversified group of publicly traded securities. When combined, this group of assets should mirror the performance of a market index or at least a segment of it. This index is a hypothetical portfolio of investment holdings that are believed to be representative of a segment of the financial market.  This fund is managed and balanced by a firm. 

For investors, this is great news! This means you can theoretically dip your toes into all of these different industries without doing your due diligence and researching any of the individual stocks. This sounds pretty good to us. After all, this sounds like an easy investment choice. But most of us know the easiest choice isn’t always the right choice when it comes to investing.

So, can you lose money in index funds?

While we continue to believe that a well-diversified representation of the market should be safe. However, consider this. An index fund will only ever be as stable as it’s underlying index. Index funds are great since they expose your portfolio to broader market exposure. This results in lower operating expenses and lower portfolio turnover. However, just because it tracks an index doesn’t mean it is a well known one. Therefore, doing some research about the index ahead of time is necessary.

Since index funds are so diversified, it is highly unlikely that they will lose all their value. Consider that to lose EVERYTHING every stock that makes up the index would also have to go to zero. While this is unlikely if every stock were to go bankrupt simultaneously. Even if this were to happen, you would likely get some of the money you invested in back when the firm sells off its assets. So in short, low risk investment index funds hold a lot of promise. It makes it more difficult to lose all your money. However, this doesn’t mean that they can’t lose any money. Index funds are best used in a long-term strategy since the portfolio typically can’t protect you against any short term market downturns.

This means for investors who understand the risks and are seeking out opportunities for passive investment opportunities, index funds are likely a good match for you. Keep in mind it’s passivity comes from the mentality that you aren’t trying to beat the market. Instead, you simply ride the trends of the market as a whole. This makes this type of investment perfect for retirement accounts.

Best Index Funds

Okay, we might’ve won you over on the concept of index funds but here is where it gets tricky. Consider that there isn’t just one index fund. There are many indexes and many funds that represent each of them. So where do you begin? We put together a list of some of the best index funds and crypto index funds. 

Like all of our other articles on trading, please be advised that we are not financial experts. These articles are merely a place to start your research. 

S&P 500 Index Fund

As of May 2020, the S & P 500 index fund has continued to outperform the majority of other index funds. In general terms, this fund is an investment vehicle that invests in the 500 stocks that encompass the S & P 500 index in proportions that are market cap-weighted. Over time, they have continued to prove their low-risk high reward with an approximate 10% annual growth rate. 

Among the most popular S&P 500 Index funds you should consider are the:

  • Vanguard 500 Index Fund
  • Schwab S & P 500 Index Fund
  • Fidelity 500 Index Fund
  • T.Rowe Price Equity Index 500 Fund
  • iShares Core S & P 500 Fund

Although slightly different, these funds are known for being among the most accurate representations of the US stock market.

Bitwise 10 Crypto Index Fund

For those crypto lovers looking for a safer way to invest in crypto, we might just have the crypto index fund for you. The Bitwise Index Fund tracks the cryptocurrencies in the Bitwise 10 Large Cap Crypto Index. This is a basket of the largest coins and includes exposure to approximately 80% of the crypto markets. These coins are then weighted by a 5-year diluted market diluted capitalization and rebalanced monthly. All assets are backed by 100% cold storage with multi-signature configuration to ensure the security of the fund.

The team backing this fund has diverse backgrounds in companies including Google, Facebook, and even military software security companies. This gives the company an edge when it comes to this space.

The minimum investment you can make into this fund is $25,000 with a 2.5% expense ratio paid based on the assets you have under their management. For a beginner investor, this might not be ideal due to the higher initial investment. Some other things to keep in mind, for the first 12 months, there is a 3% early withdrawal fee on redemptions. Afterward, there is no fee. This makes the Bitwise 10 Crypto Index Fund more suitable for longer-term investors.

iShares Edge MSCI Min Vol EAFE ETF 

If neither of these funds seemed like a good fit, this one might take a different approach. The EFAV fund opens your portfolio to international securities. The securities are chosen from well-established companies in developed markets from Europe, Australia, Asia, and the Far East. This gives your portfolio even greater diversity with security in knowing that it typically has declined less than other portfolios during downturns.

The fund has a yield to date return of 11.37% (in 2019) and only has expenses of 0.20%. While the fund itself isn’t massive, the expenses are low making it a great starting point for investing.

Fidelity ZERO Large Cap Index 

Next on the list is the Fidelity ZERO Large Cap Index. This index fund has a zero expense ratio. Rather than following the S & P 500 it follows the Fidelity U.S. Large Cap Index. While this isn’t the same as the S & P it is remarkably close. The only difference? The savings from not paying the S & P name fee keeps the cost of investing 0. The year to date return is currently 8.23% which can be attributed to the fund investing at least 80% of assets into common stocks. These stocks are considered large-capitalization stocks. This means stocks that are of the largest U.S. companies based on market capitalization. To most, this would suggest greater stability. 

The current holdings (stocks that make up the fund) include Microsoft, Amazon, Apple, Facebook, and Google. This represents a broad combination of both growth and value-oriented stocks.

WisdomTree U.S. Midcap Dividend Fund

Last but not least is the WisdomTree U.S. Midcap Dividend Fund. With a yield to date return of 13.83% and expense of 0.38%, this is another notable fund for the books. This fund is made up of mid-cap companies. These companies are defined as having moderate risk, while simultaneously having a decent growth rate. 

Keep in mind for a mid-cap index a 0.38% is lower than average, making it an even better investment in our eyes.

Selecting Your Index Fund

After consulting this list, you might be wondering how to pick which index fund you want to invest in. While your personal investment goals should greatly influence your decision, there are a few other factors to keep in mind.

image of woman making financial decisions - can you lose money in an index fund

What are you holding?

When choosing your index fund you might compare their offerings based on the company size and capitalization, location of the exchange, business sectors or industries represented, asset types, and market opportunities. While you might be quick to think that the index in the fund’s name will describe what you are investing in, this is not always the case. Some fund managers might decide to invest in stocks that are similar to those in the index. This means you might not necessarily be investing in an “exact mirror” of the index.


When it comes to your money, security is everything. This means you should trust that your broker is who they say they are. So stick to well-known, well-reviewed funds rather than a random offer. If an offer sounds too good to be true it likely is. For Canadian investors, consult the Investment Industry Regulatory Organization of Canada (IIROC). Most trusted funds will be a part of this offering you a little extra peace of mind.

Comparing Expense Ratios (and Other Fees)

Finally, it’s important to consider the index fund’s expense ratio. Although this might sound like yet another formula you don’t want to keep track of this one is important. The expense ratio is the fund’s operating expenses which will impact what you will pay for the fund issuer to invest your money. It is important to compare your expected return to the costs of investment to ensure you are still turning a profit. Consider that choosing a discount broker, online might offer you lower fees. However, for some of us, we require access to a real broker who you can chat with about your investment decisions. If this is the case you might opt for a more expensive in-person portfolio manager.

Another area for consideration is the commission fees when you buy or sell. Platforms tend to vary. However, you can often find a flat rate for each purchase from anywhere between $0-$10. This is important to remember, especially if you plan on doing many smaller trades.

Other factors that will contribute to your decision should also include the minimum investment that you are able to make into the index fund and if monthly additions are a requirement.

Set Up Your Account

Once you’ve consulted this list, you can purchase your chosen fund through a brokerage firm or a mutual fund company. If you decide to purchase directly from the organization issuing the fund keep in mind you will be restricted to only purchasing funds from that one issuer. After selecting the platform and the index, you’ll just have to link your bank account to the investment account and you’ll be ready to go. With your funds linked, you will be able to decide how many shares you want to buy. You might even decide to set up automatic transfers. This will help you to continue to add to your portfolio and grow your investment fund. Now it’s time to sit, wait, and watch your money grow!

Index Fund Cautions

Keep in mind that index funds are passive ways of investing. This means that for those that like to be heavily involved in their investments, it might be hard to just let your money sit. Prior to choosing your index fund, you should be careful to understand the principles behind the build of the fund to ensure it matches what you are hoping to achieve. This will make it easier to sit back and let the fund owners do their job.

Additionally, for investors who will need to withdraw funds in the next five years, index funds may not be for you. While some are designed for the shorter term, it is more common to see an index fund as a stable investment that will accumulate if you give it enough time. In an ideal world, this might be up to 10 years. For a shorter-term guaranteed investment, you might consider a 1 or 2 years guaranteed investment certificate (GIC) or other short term bonds.

Safe Investment Alternatives

Index funds are not the only safe way to invest. Consider that low-risk options trading strategies also provide great opportunities to make profits on your investment with lower risk. While these strategies are many, the guide we linked is a great place to start! Alternatively, tax-free investments like a crypto savings fund or a TFSA can be a great way to enhance your savings.

Losing money in an index fund is never fun, so If investing in an index fund doesn’t sound like your thing, don’t worry. For other opportunities for safer investing, downloading the Hedgetrade app. Here you can learn from the best investors and unlock the blueprints that contain their picks. With this app, you’ll be well on your way to investing with the greats!