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.

INVESTOPEDIA EXPLAINS '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. Active Management

    The use of a human element, such as a single manager, co-managers ...
  5. Index Fund

    A type of mutual fund with a portfolio constructed to match or ...
  6. Next Generation Fixed Income (NGFI) ...

    A Next Generation Fixed Income (NGFI) manager is a fixed income ...
RELATED FAQS
  1. How much variance should an investor have in an indexed fund?

    An investor should have as much variance in an indexed fund as he is comfortable with. Variance is the measure of the spread ... Read Full Answer >>
  2. Where can I find a good compound interest calculator free on the Internet?

    A number of free online compound interest calculators are offered online. One of the best is available through Pine Grove ... Read Full Answer >>
  3. How is compound interest taxed?

    Compound interest is money that is earned and added to a principal balance and then earns additional interest. Adding interest ... Read Full Answer >>
  4. How often is interest compounded?

    Interest can be compounded on any given frequency schedule. Common interest compounding time frames are daily, monthly, semi-annually ... Read Full Answer >>
  5. What are some of the best small cap index funds?

    The best small-cap index funds are the iShares Russell 2000 ETF (IWM), SPDR S&P 600 Small Cap ETF (SLY), Vanguard Russell ... Read Full Answer >>
  6. What are some index funds that specialize in blue chip stocks?

    Some index funds that specialize in blue-chip stocks are the Fidelity Blue Chip 35 Index Fund (BRLIX), Vanguard Dividend ... Read Full Answer >>
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. Options & Futures

    Key Factors Of The Russell 2000 Index

    The Russell 2000 index represents the small cap universe, with a broad selection of fast growth companies at the bottom end of the capitalization spectrum.
  6. Active Trading Fundamentals

    Where And How Should You Make Your First Trade?

    New traders should enter markets that offer the greatest opportunity for learning their craft while keeping risk at a minimum.
  7. Investing

    How Do Millennial Women Invest?

    The theme for Women’s History Month is “Make it Happen”, and that is exactly what millennial women are doing when it comes to their investments.
  8. Professionals

    Should Investors Nix Actively Managed Funds?

    Index fund returns are on a tear but does this mean investors should nix actively managed funds?
  9. Mutual Funds & ETFs

    ETF Bubble Or No Bubble?

    ETFs might be the recommendation of choice for the unimaginative financial advisor, but that doesn’t mean that the industry is in a bubble.
  10. Mutual Funds & ETFs

    Why Mutual Funds Lose Their Five-Star Ratings?

    Ratings help people feel confident about their decision before purchasing. Morningstar’s rating system helps people to find and invest in mutual funds.

You May Also Like

Hot Definitions
  1. Merger Arbitrage

    A hedge fund strategy in which the stocks of two merging companies are simultaneously bought and sold to create a riskless ...
  2. Market Failure

    An economic term that encompasses a situation where, in any given market, the quantity of a product demanded by consumers ...
  3. Unsystematic Risk

    Company or industry specific risk that is inherent in each investment. The amount of unsystematic risk can be reduced through ...
  4. Security Market Line - SML

    A line that graphs the systematic, or market, risk versus return of the whole market at a certain time and shows all risky ...
  5. Tangible Net Worth

    A measure of the physical worth of a company, which does not include any value derived from intangible assets such as copyrights, ...
  6. Marginal Utility

    The additional satisfaction a consumer gains from consuming one more unit of a good or service. Marginal utility is an important ...
Trading Center