An indexed option simply means your money is invested to track a market, like Australian shares or global shares, rather than having a fund manager actively picking stocks. That's the main reason indexed options are usually cheaper than actively managed ones: there's less research and decision making happening behind the scenes, so the cost of running the option is lower.
Here's the part that catches a lot of people out though. Just because two funds both offer an "indexed" or "index" option doesn't mean they're doing the exact same thing. Funds often follow slightly different versions of an index, and some build in their own adjustments, like excluding tobacco or thermal coal companies for ethical reasons. So two indexed options can hold a genuinely different mix of companies, even when they're both tracking "the Australian share market."
It's also worth looking at how a fund actually builds its indexed option. Most funds buy the underlying shares directly. Some instead use external fund structures or derivatives to copy the index's performance. That approach can work perfectly well, but it introduces its own considerations, like relying on another financial institution to hold up their end of the contract.
Finally, fees on an indexed option are usually split into two parts: an admin fee (sometimes a flat dollar amount, sometimes a percentage, sometimes both) and an investment fee (the cost of actually running that specific option). Looking at only one of these numbers can be misleading. To compare fairly, you want to add both together and apply them to a real balance, which is exactly how we've built the table below.
