Index Fund


DEFINITION of 'Index Fund'

An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standard & Poor's 500 Index (S&P 500). An index mutual fund is said to provide broad market exposure, low operating expenses and low portfolio turnover.


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"Indexing" is a passive form of fund management that has been successful in outperforming most actively managed mutual funds. While the most popular index funds track the S&P 500, a number of other indexes, including the Russell 2000 (small companies), the DJ Wilshire 5000 (total stock market), the MSCI EAFE (foreign stocks in Europe, Australasia, Far East) and the Barclays Capital Aggregate Bond Index (total bond market) are widely used for index funds.

Investing in an index fund is a form of passive investing. The primary advantage to such a strategy is the lower management expense ratio on an index fund. Also, a majority of mutual funds fail to beat broad indexes, such as the S&P 500.

Want to know more about index funds? Read Index Investing: Index Funds

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  4. What is considered a good turnover ratio for a mutual fund?

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  6. Who regulates the various types of exchange traded funds (ETFs)?

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  7. How much variance should an investor have in an indexed fund?

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  9. What's the difference between an index fund and an ETF?

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  10. Why do index funds tend to have low expense ratios?

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  11. What are the disadvantages of an index fund over an actively managed fund?

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