Index Funds

Index funds are mutual funds or exchange-traded funds (ETF) composed of stocks or other assets tracked by a particular index, such as the S&P 500, and the percentage of each asset in the fund is usually proportional to the weight of that asset in the index so that the fund accurately tracks the index. Index funds are considered a good investment because few funds beat the indexes, and fees are minimal since trading, and its cost, is restricted to tracking the index.

However, index funds usually lag the index by a tracking error. The returns of index funds are less than what the index would indicate due to fund expenses, including the cost of buying and selling assets to maintain parity between the fund and the index. For instance since its inception, the iShare S&P 500 Index Fund (IVV) has lagged the S&P 500 Stock Index by a mere 0.06% (as of 12/31/2009).

Some funds minimize these trading costs by buying only the most liquid assets of the index — hence, part of the tracking error comes from not including the less liquid assets in the fund. Liquidity costs, equal to the bid/ask spread, also creates a larger tracking error for funds of smaller indexes composed of illiquid assets compared to funds tracking popular indexes, such as the S&P 500 or the Dow Jones Industrial Average, whose underlying assets are traded frequently, with narrower bid/ask spreads.

Nowadays, indexes cover virtually every asset class. Some asset classes are covered by several indexes, and there may be multiple funds covering each index. Hence, not only can an investor choose to follow an asset class, but can also choose the index that tracks that asset, and choose the fund that follows that index.

For instance, 3 ETFs that cover small-cap growth companies include:

As you can see from this graph, which compares returns for the 3 funds, it pays to compare different funds:
https://www.google.com/finance/quote/IJT:NASDAQ?window=MAX&comparison=NYSEARCA%3AVBK%2CINDEXDJX%3ADWSG

Hence, to maximize investment returns with index funds:

It is easy to find and compare different funds for different asset classes online. For instance, checking a particular fund at Google Finance, such as the S&P SmallCap 600 Growth Fund, will list other funds covering the same asset class, under its Related Companies section.