An index fund is a pooled investment that holds the same stocks or bonds as a market benchmark, in the same proportions, and follows a passive approach. The flagship U.S. example is a fund tracking the S&P 500, but total-market index funds like Vanguard's VTI hold thousands of holdings. The dominant evidence shows that over 10+ year horizons, more than 80% of actively managed funds underperform their benchmark after fees, according to SPIVA scorecard data. This is the central case for passive investing: low-cost index funds deliver the market return, while the average active fund delivers the market return minus its expense ratio.
Among Vanguard products, VTI is the total U.S. stock market ETF, VOO is the S&P 500 ETF, and VTSAX is the total U.S. stock market mutual fund share class of the same portfolio as VTI. The S&P 500 holds roughly 500 large-cap U.S. stocks, while the total market holds around 3,500 stocks including mid- and small-cap names; the two portfolios overlap by about 85%, and either works as a U.S. core holding. All three are part of the Bogleheads three-fund portfolio, which combines a total U.S. stock fund, a total international stock fund (VXUS at Vanguard, FZILX at Fidelity, SCHF at Schwab), and a total bond fund (BND, FXNAX, or SCHZ) into a complete diversified portfolio.
Three properties define a good core ETF: broad diversification, a low expense ratio (0.10% or less), and liquidity, meaning tight bid-ask spreads and high assets under management. ETFs differ from mutual funds in a key tax dimension: ETFs use an in-kind creation and redemption mechanism that allows authorized participants to swap baskets of underlying stocks for ETF shares, flushing low-cost-basis shares without realizing capital gains. Mutual funds, by contrast, may distribute embedded capital gains to all holders at year-end. This is why Vanguard's ETF and mutual fund share classes share the same tax efficiency — they cross-share the in-kind redemption mechanism, which keeps ETF prices near NAV and lets ETFs avoid forced sales that trigger gains.