Index Fund
A mutual fund or ETF designed to track the performance of a specific market index.
Definition
An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific financial market index, such as the S&P 500, Nasdaq-100, or total stock market. Index funds follow a passive investment strategy — instead of trying to beat the market through active stock picking, they simply hold all (or a representative sample) of the securities in the target index. This approach results in lower expense ratios (often 0.03-0.20% vs 0.50-1.50% for active funds), greater tax efficiency, and historically better long-term performance than most actively managed funds. Warren Buffett has famously recommended index funds for most investors.
Related Terms
ETF (Exchange-Traded Fund)
A basket of securities that trades on an exchange like a stock.
InvestingMutual Fund
A pooled investment vehicle managed by professionals that invests in stocks, bonds, or other securities.
InvestingExpense Ratio
The annual fee charged by a fund to cover operating expenses, expressed as a percentage of assets.
InvestingDiversification
Spreading investments across various assets to reduce risk.