Many market pundits are either for or (more likely) against indexing seemingly as a matter of principle. However, no sweeping principle is involved. It is simply a matter of cost. A managed equity fund with a very low expense ratio has a much better chance of beating the market index than a managed equity fund with a very high expense ratio. By the same token, an index fund with a low expense ratio will come closer to matching the index itself than an index fund with a high expense ratio. If expense ratios and turnover costs are ignored, the average returns of managed funds and index funds should be about equal (although the returns of the individual managed funds, unlike those of the index funds, will diverge sharply from one another.) Obviously, the average equity fund, with estimated annual costs of 2.4%, is carrying extra baggage in a race against an index fund with annual costs of 0.2%. However, some index funds incur annual costs of 0.50% to 1.25%, and thus will fall short of the market by that amount. The lower the index fund's cost, then, the closer it is able to match its benchmark. Therefore, you should invest only in those index funds with the lowest expense ratios, and you should never pay a sales load when you invest in an index fund.

YAHOO! FINANCE TIP Yahoo! Finance reports a mutual fund's expense ratio and saled load data on its profile page. For an example, see VFINX's profile page.