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I am reading that if you want to start out investing long-term, start with index funds, as they take care of selecting the stocks and diversifying the portfolio, and all I need to do is invest in the fund.

Ok, but surely the ones who did all that work need to make money somehow. So how will they be profiting? Would it be off of me somehow?

JTP - Apologise to Monica
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Massum
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    Vanguard is an exception to these answers, as it's owned by those who own its funds and operated at cost. – Craig W Apr 18 '18 at 19:35
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    Is this question how the index manager (e.g. Vanguard) gets paid, with two answers already; or how e.g Standard and Poor's, who choose what goes in the S&P 500 index, gets paid (with no answers already, and thinking about it, I am now curious)? – user662852 Apr 18 '18 at 19:36
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    The names of the people who created the S&P 500 index are Standard and Poor. As the names suggest, they don't make any money off their work in devising the index. – Dilip Sarwate Apr 18 '18 at 20:01
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    @DilipSarwate Clever. Joking aside, funds pay a license fee to the creator of the index in exchange for using the index in their fund. In their pursuit of low fees, Vanguard occasionally gets in fights with index providers. Vanguard also changed the benchmark for some of its because an alternative index had lower license fees. – Nobody Apr 18 '18 at 20:38
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    @RPL The funds pay a licensing fee for using the name Standard & Poor 500 Index in their advertisements and prospectuses, not for using the index or following it. As the saying goes, It's a free country and a fund manager can choose to invest in all the 500 companies in the S&P Index in exactly the right proportions without paying a fee to Standard and Poor, but the fund cannot call itself a S&P 500 Index Fund without running into licensing issues. – Dilip Sarwate Apr 18 '18 at 21:25
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    @DilipSarwate You are right, of course, but then it's debatable whether a fund that follows an index while neither using the index in the name, nor promising to follow the index in the prospectus is really an "index fund". Nothing about such a fund would give investors in any reason to believe that it will follow the index in the future, and any attempt to hint that the fund is actually tied to the index would likely lead to legal trouble with the licensor. In practice, most funds that intend to operate as index funds are going to just pay the fee and avoid the trouble. – Nobody Apr 19 '18 at 20:37

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From a quick Google:

According to Morningstar Investment Research:

1) The average ETF carries an expense ratio of 0.44%, which means the fund will cost you $4.40 in annual fees for every $1,000 you invest.

2) The average traditional index fund costs 0.74%.

Bob Baerker
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Yes, they charge an annual fee for managing the fund. It’s lower than the fee for actively managed funds, but there’s still a fee of perhaps 0.25% or 0.5% per year.

Mike Scott
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An index provider creates the index (similar to a software company's IP) to track the performance of a market, market segment, investment strategy, or asset class. A financial institution enters into a license agreement with the index provider (obtaining access to the IP) allowing them to create and market an investable vehicle that is designed to replicate the performance of the underlying index as closely as possible, before deduction of product management fees. These product management fees are part of what you pay (e.g. the expense ratio) as an investor in the product. The investment company uses a portion of what you pay the fund to cover the license fee owed to the index provider.

This how the index provider makes most of its money. If total revenue > total expenses, then they profit from their operation.

In the case of actively managed products, mutual fund profits are often at the expense of the funds share owners. Investment advisors and broker-dealer firms usually get a slice as well. This is less so for indexed strategies (less costly to manage) and varies depending on scale and the ownership structure of the fund complex, which includes marketing and distribution.

The most economic option for most investors not interested in managing their own investments is an indexed option. Just know index selection as well as type of investment vehicle can have important implications for your resulting after-tax compound rate of return.

Private Pyles
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