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Definition

Index Fund

A portfolio of stocks or bonds that mirrors the composition and performance of a financial market index is called an Index Fund.

A mutual fund or exchange-traded fund (ETF) that tracks or matches the components of a financial market index, such as the S&P 500 Index, Russell 2000 Index, is known as an Index fund.

The expense of managing index funds is lower than most of the actively managed funds. Instead of following an active investment strategy, these funds maintain a passive one.

A broad market exposure, minimal operating expenses, and low portfolio turnover are all stated to be the major benefits of an index mutual fund. Regardless of market conditions, these funds track their benchmark index.

The term "indexing" refers to one distinct type of passive fund management system. Rather than actively picking stocks and market timing, choosing assets to invest in, and planning when to purchase and sell them, the fund portfolio manager constructs a portfolio of the holdings that match the stocks of a certain index.

Most of the existing financial market has index and index funds. For instance, in the U.S, the most popular index funds follow S&P 500, but there are several other indexes out there, including:

  • Russell 2000 (includes top 2000 small-cap company stocks)
  • MSCI EAFE (contains foreign stocks from Europe, Australia and the Far East)
  • Wilshire 5000 (the largest U.S index)

 

Use of this term in a sentence

  • According to investors, index funds are ideal for retirement accounts.
  • Index funds are generally considered as a safer and more reliable investment plan for average investors.

 

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