Index Fund
A fund that mechanically tracks a market index rather than picking stocks, giving broad exposure at very low cost.
What Index Fund means
An index fund holds the securities in a market index — the S&P 500, a total US market index, a global index — in roughly the proportions the index specifies. There is no manager choosing what looks attractive; the fund simply mirrors its benchmark.
That passivity is the point. It keeps expense ratios extremely low and eliminates the risk that a manager underperforms. Over long horizons, the substantial majority of actively managed funds fail to beat their benchmark after fees.
The result is instant diversification: a single total-market fund holds thousands of companies across every sector.
Index funds and index ETFs pursue the same strategy in different wrappers. Mutual fund shares price once a day and often allow automatic recurring investment; ETF shares trade intraday and can be bought anywhere that offers brokerage access.
Related terms
ETF (Exchange-Traded Fund)
A fund holding a basket of investments that trades on an exchange like a single stock, usually tracking an index at low cost.
Expense Ratio
The annual percentage of your investment that a fund charges to operate, deducted automatically from returns.
Diversification
Spreading money across many investments so that a loss in any one of them does limited damage to the whole portfolio.
Asset Allocation
How you divide a portfolio among stocks, bonds, cash, and other asset types — the single biggest driver of its risk and return.
Dollar-Cost Averaging
Investing a fixed amount on a regular schedule regardless of price, which smooths out your average purchase cost.
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