Index investing means buying a fund that holds every company in a market index, in the same proportions as the index, instead of picking individual shares. You get the market’s return minus the fund’s costs, no more and no less. It is popular because it is cheap, spreads your money across many companies in one purchase and needs little upkeep.
The catch is just as simple. When the market falls, an index fund falls with it, and it cannot step aside. This guide explains what index investing is, how the weighting works and where the risks sit, using Singapore examples. Any index or fund named here is an example, not a recommendation.
What Is Index Investing, in Plain Terms
An index is a list of companies with a rule for how much weight each one gets. The Straits Times Index (STI) is Singapore’s best-known: State Street describes it as tracking “the top 30 largest and most liquid companies listed on the Singapore Exchange”. The S&P 500 does the same for about 500 large US companies, and the MSCI ACWI covers large and mid-sized companies in 47 countries.
An index fund buys those companies so that its value moves with the index. MoneySense describes most ETFs as passively managed: they aim to track an index, not beat it, which keeps fees lower than for actively managed funds.
You can hold an index fund in three main ways in Singapore:
- An ETF on an exchange, bought through a broker like a share. Our ETF investing guide covers the mechanics.
- An index unit trust, bought through a bank or fund platform. See how to invest in unit trusts.
- A robo-adviser portfolio built from index funds. See robo-advisors explained.
How Market-Cap Weighting Works
Most broad indices are weighted by market capitalisation: the company’s share price times the number of shares available to trade. Bigger companies get bigger slices.
That has two consequences. The fund needs little trading, because weights adjust automatically as prices move. And the largest companies dominate the result.
The numbers show how far that goes:
| Index | Largest holdings | Share of the index | Date and source |
|---|---|---|---|
| STI | DBS, OCBC, UOB | 57.25% (three banks) | 12 Nov 2026, SPDR STI ETF fund page |
| S&P 500 | Top 10 companies | About 37% | November 2026, SPDR S&P 500 ETF page (index holdings) |
| MSCI ACWI | US-listed companies | 64.63% | 30 Oct 2026, MSCI factsheet |
So an STI fund is, to a large extent, a bet on three Singapore banks. A “world” fund is roughly two-thirds a bet on the United States.
Why Index Investing Is Popular
Low cost. Fees come out every year whether the fund does well or not. MoneySense notes that “a TER difference of 1% per year can compound into tens of thousands of dollars of reduced wealth”. Broad index ETFs often charge a fraction of what an active fund does; our pros and cons guide works through the maths on S$100,000.
Diversification in one purchase. One fund can hold 30, 500 or more than 2,000 companies. A single company’s collapse moves the fund only by its weight.
Hard to beat after costs. S&P Dow Jones Indices’ SPIVA report found that 91.03% of all US large-cap funds trailed the S&P 500 over the 20 years to 30 June 2025. That is US data; our index funds vs active funds piece explains what it does and does not show.
Little upkeep. No company research, no deciding when to sell individual shares. Many people pair it with regular monthly investing; the compound interest calculator shows how time and contributions add up.
The short version: index investing buys a whole market at low cost. You will never beat that market, and you will never escape its falls.
The Risks You Take On
You get every fall. MSCI’s factsheet records a maximum drawdown of 58.38% for the MSCI ACWI, from 31 October 2007 to 9 March 2009. A fund tracking it would have fallen by about the same, plus costs. MoneySense is blunt: if the index falls 10%, a fund tracking it falls about 10%.
Concentration in the largest companies. Market-cap weighting means more money goes into whatever has already grown biggest. If those companies fall together, the “diversified” fund falls hard.
Sector and country tilt. The STI is not a slice of the world economy. The SPDR STI ETF’s page shows financials at 60.68% of the fund on 12 November 2026.
Currency risk. A fund holding US companies moves with the US dollar against the Singapore dollar as well as with share prices. Our guide to investing in the S&P 500 from Singapore shows the effect.
Tracking error and costs. A fund will not match its index exactly. See expense ratio, tracking error and spreads explained.
No deposit protection. Index funds are investments, not deposits, and are not covered by SDIC deposit insurance.
Who It May Not Suit
Index investing assumes you can hold through bad years. It may suit you less if you need the money within a few years, cannot sit through a large fall without selling, or want a guaranteed income. For money you need soon, compare T-bills, Savings Bonds and fixed deposits instead.
What To Do Next
- Decide which market you want exposure to before looking at any fund: Singapore, the US, or the world.
- Read the most common index investing mistakes before you buy.
- For any fund you consider, read its prospectus and product highlights sheet, and note the expense ratio, the top holdings and how it handles dividends.
- Check that the platform you use is listed in the MAS Financial Institutions Directory, and check the fund on MAS’s OPERA database.
- This is general information, not advice on your situation.
