Index Investing

AAA

DEFINITION of 'Index Investing'

A form of passive investing that aims to generate the same rate of return as an underlying market index. Investors that use index investing seek to replicate the performance of a specific index – generally an equity or fixed-income index – by investing in an investment vehicle such as index funds or exchange-traded funds that closely track the performance of these indexes.

BREAKING DOWN 'Index Investing'

Proponents of index investing eschew active investment management because they believe that it is impossible to "beat the market" once trading costs and taxes are taken into account. As index investing is relatively passive, index funds usually have lower management fees and expenses than actively managed funds. Lower trading activity may also result in more favorable taxation for index funds as compared with actively managed funds.

RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Indexing

    1. The adjustment of the weights of assets in an investment portfolio ...
  3. Closet Indexing

    A portfolio strategy used by some portfolio managers to achieve ...
  4. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
  5. Active Management

    The use of a human element, such as a single manager, co-managers ...
  6. Passive Income

    Earnings an individual derives from a rental property, limited ...
Related Articles
  1. Mutual Funds & ETFs

    ETFs Vs. Index Funds: Quantifying The Differences

    If you are trying to choose between these two index-tracking investments, compare the costs.
  2. Mutual Funds & ETFs

    The Hidden Differences Between Index Funds

    These funds don't all match index returns. Find out how to avoid costly surprises.
  3. Mutual Funds & ETFs

    Enhanced Index Funds: Can They Deliver Low-Risk Returns?

    These funds may look appealing. Find out whether they can really live up to all of their promises.
  4. Options & Futures

    The Lowdown On Index Funds

    If you can't beat the market, why not join it? Read on to go over your options.
  5. Investing Basics

    Calculating the Margin of Safety

    Buying below the margin of safety minimizes the risk to the investor.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  7. Investing Basics

    If You Had Invested Right After Amazon's IPO

    Find out how much you would have made if you had invested $1,000 during Amazon's IPO, including how the power of the stock split affects investment growth.
  8. Professionals

    Index or Target Dates in 401(k)s: Which is Better?

    A common question is whether or not plan participants should choose index or target date funds in a 401(k). The answer depends on different scenarios.
  9. Professionals

    Holding Out for Capital Gains Could Be a Mistake

    Holding stocks for the sole purpose of avoiding short-term capital gains taxes may be a mistake, especially if all the signs say get out.
  10. Mutual Funds & ETFs

    What's The Difference Between Bond & Equity ETFs?

    Learn how different stock ETFs and bond ETFs are, though they actually have quite a few things in common.
RELATED FAQS
  1. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  2. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  3. What is the formula for calculating the capital asset pricing model (CAPM) in Excel?

    The capital asset pricing model (CAPM) measures the amount of an asset's expected return given the risk-free rate, the beta ... Read Full Answer >>
  4. What is the formula for calculating return on investment (ROI) in Excel?

    Return on investment (ROI) measures the performance of an investment by measuring the gain from an investment and the cost ... Read Full Answer >>
  5. What are the most important equity market indexes?

    The most important equity market indexes are the S&P 500, Nasdaq Composite and Russell 2000. These indexes in total provide ... Read Full Answer >>
  6. What is the 12b-1 fee meant to cover?

    A 12b-1 fee in a mutual fund is meant to cover the fees of companies and individuals through which investors of a fund buy ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  2. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  3. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  4. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  5. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
  6. Wedding Warrant

    A warrant that can only be exercised if the host asset, typically a bond or preferred stock, is surrendered. Until the call ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!