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Published: Apr 05, 2023 6 min read

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Illustration of Russian dolls representing index funds gains
Chris Gash for Money

Since its creation more than four decades ago, one market invention has become a go-to for many everyday investors: the index fund. But recent research shows that index funds' popularity might actually reduce returns for investors over the long term.

Index funds are designed to mimic the performance of a specific market index, like the S&P 500 or the Dow Jones Industrial Average. They can allow the average person to invest widely across the entire stock market with a relatively small amount of risk compared to picking stocks individually.

Researchers from the University of Oxford and the University of California, Los Angeles recently built a model that shows what happens to stock prices and investor welfare as index funds become cheaper and more popular. They're certainly not telling you to give up on index funds — which can provide a strong foundation for your investment portfolio — but the results do provide insight into a lesser-known effect the rush to index funds could be having on investors.

Index fund performance