Indexed options in your super fund: Pros and cons

An accepted player on the Australian investment scene for decades, index investing is now mainstream, with most large super funds and platforms now offering indexed or passive investment options.

Indexed investments were launched in Australia back in the 1990s by US investment giant Vanguard. The strategy was popularised in the 2000s by the introduction and rapid growth of exchange-traded funds (ETFs), which are typically index based.

Once again, Vanguard was instrumental in the spread of index-based ETFs. And as a sign that indexing had taken root in Australia’s superannuation sector, Vanguard launched its own super fund in Australia in November 2022 to much fanfare.

In the year to June 2025, Vanguard was the fastest-growing super fund in terms of assets under management, up 131% (albeit from a low base), according to the latest figures from the Australian Prudential Regulation Authority (APRA).

So, if you’ve noticed your super fund offers indexed investment options but you’re not sure what they are or how they work, this guide is for you.

What is an index?

A market index is a group of investments that tracks the performance of a market or market segment. A list of investments is chosen by the index’s creator, usually global investment companies such as Standard & Poor’s (S&P) and Bloomberg. The calculation of the index value comes from the prices of the investments listed.

There are indexes for almost every asset class, the most common being Australian and international shares, property and bonds. For example, some of the most popular share indexes are the S&P 500, which tracks the performance of the top 500 US stocks, the Nasdaq Composite Index, which tracks the top US-listed tech companies and Australia’s S&P/ASX 200, which tracks the top 200 companies listed on the Australian Securities Exchange (ASX).

Investors can’t invest directly in an index. Instead, indexes are used broadly as benchmarks or for developing index funds.

How do index funds work?

Index funds are designed to provide exposure to the performance of an investment market or market sector by tracking the performance of its key index.

To track the index, an investment manager buys assets in the same weighting as they occur in the index they are tracking. The aim is to match or duplicate the return of the index – both up and down – by investing in the whole index or a representative sample of it.

Index funds are sometimes referred to as passive investments as they involve passively buying the market or market sector, rather than trying to actively select investments you, or a fund manager, believe will outperform the overall market.