The characteristics of index funds are mainly reflected in the following aspects:

(1) Low Costs

Due to passive investing, the management fees of index funds are generally low. In the U.S. market, the average management fee for index funds is about 0.18%–0.30%. Additionally, because index funds adopt a buy-and-hold strategy and do not frequently trade stocks, transaction costs such as commissions are much lower than those of actively managed funds. This difference can sometimes reach 1%–3%. Although this may seem like a small amount in absolute terms, the compounding effect over a long period can significantly impact the fund's returns.

(2) Risk Diversification and Mitigation

On one hand, since index funds invest broadly, the fluctuation of any single stock will not significantly affect the overall performance of the fund, thereby diversifying risk. On the other hand, because the tracked indices usually have a long historical record, the risk of index funds is, to some extent, predictable. Moreover, the passive strategy of tracking index components can effectively reduce non-systematic risks and the moral hazard of fund managers.

(3) Tax Efficiency

Since index funds follow a buy-and-hold strategy, their portfolio turnover is very low. They only sell stocks when a stock is removed from the index or when investors redeem their shares, realizing capital gains. As a result, the capital gains taxes paid annually are minimal. Combined with the power of compounding, tax deferral provides significant benefits to investors, especially over many years, where this effect becomes even more pronounced.

(4) Lower Monitoring Requirements

Because index funds do not require active investment decisions, fund managers generally do not need to closely monitor the fund's performance. The primary task of an index fund manager is to track changes in the target index to ensure the fund's portfolio remains aligned with it, achieving the goal of "earning returns by tracking the index."