A:

There are few certainties in the financial world, but we can say that there is almost zero chance that any index fund could ever lose all of its value.

There are a few reasons for this. First of all, virtually all index funds operate with a very high level of diversification. Most index funds attempt to mirror some large basket or index of stocks, such as the S&P 500, by simply buying and holding identical weights of each stock as the index itself. Thus, because an index fund's holdings are almost always extremely well diversified, it is virtually impossible that all of these holdings' market prices would fall to zero, destroying the value of the entire index. (See also: Introduction To Diversification and The Importance of Diversification.)

Think about it this way: If you randomly pick 100 companies, the odds that a single company of the 100 will go bankrupt might be quite high. However, the odds that each and every one of the 100 companies will go bankrupt and leave shareholders with zero equity is essentially nil. Thus, an investment in a typical index fund has an extremely low chance of resulting in anything close to a 100% loss.

Banking on Book Value

Furthermore, the overall stock market, which most index funds tend to represent with their holdings (or at least a portion or particular sector of the overall market), is almost certain to be producing tangible value over the long term. Because of this, the total book value of all the underlying stocks in an index is expected to go up over the long term. This ensures that any well-diversified index fund will not significantly decline in value over the long term.

Index funds tend to be attractive investments for a well balanced portfolio. In addition to diversification and broad exposure, these funds have low expense ratios, making them inexpensive to own compared to other types of investments. The wide variety of index funds means that you can dip your toe into a number of different industries, sectors and stock classes without doing the legwork of due diligence on individual stocks. 

For novice investors, long-term investors, and those who don't want to spend too much time managing the portfolio, index funds offer a relatively low-risk way to invest and gain exposure to a wide range of equities. (See also: Index Investing and Being Lazy With A Couch Potato Portfolio.)

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