Index Investing

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.

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RELATED FAQS
  1. What's the difference between an index fund and an ETF?

    Learn about the difference between an index fund and an exchange-traded fund and how index fund investing compares to value ... Read Answer >>
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    Learn the difference between actively-managed funds and index funds. Explore the risks and benefits associated with each ... Read Answer >>
  3. How can I calculate the tracking error of an ETF or indexed mutual fund?

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  4. Should I invest in ETFs or index funds?

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  5. What is the difference between a smart beta fund and an index fund?

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  6. How does a point change in a major index effect its equivalent exchange-traded fund?

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