Next video:
Loading the player...

An index fund is a type of mutual fund that is tied to a broad stock index like the S&P 500 or the Dow Jones Industrial Average, instead of being handpicked and managed by an investment manager.  For instance, a fund that tracks the S&P 500 index would own the same stocks as those within the S&P 500. Since there is no fund manager actively buying and selling stock, an index fund is also called a passively managed fund.  

"Indexing" 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.

One of the main arguments of active managers against index funds is that index investors are essentially giving up. Since an index fund will always earn a return identical to that of the market it is tracking, index investors will not be able to take advantage of any anomalies and surprising opportunities that occur. For instance, during the tech boom of the late '90s when new technology companies reached record highs, index funds were unable to match the record amounts of some actively-managed funds.

 

 

Related Articles
  1. Investing

    The Lowdown On Index Funds

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

    5 Things You Need To Know About Index Funds

    Index funds, at their best, offer a low-cost way for investors to track popular stock and bond market indexes. But not all index funds are created equally.
  3. Financial Advisor

    The 4 Best U.S. Equity Index Mutual Funds

    Find out which four index mutual funds are among the best U.S. equities index mutual funds for core holdings in your investment portfolio.
  4. Investing

    3 Index Funds with the Lowest Expense Ratios

    Read detailed information about index mutual funds with some of the lowest expense ratios in their categories, and learn about their pros and cons.
  5. Investing

    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.
  6. Investing

    Fund Management Issues

    The quality of management is a key component of a fund's success.
  7. Insights

    This Bull Market Is Supported by the Index Funds Investment

    The massive growth of index funds has been supporting the bull market and could lead to a steeper correction when it happens.
  8. Investing

    Make Sure You Avoid Adding These Mutual Funds to Your 401(k)

    Find out which five types of mutual funds you should avoid in your 401(k), including why buying this year's hottest fund is likely a losing bet.
  9. Financial Advisor

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

    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.
  10. Investing

    No Load Vs. Index Fund: Is One Better Than the Other?

    Find out how no-load funds, index mutual funds and ETFs can help investors boost returns just by cutting down on expenses and sales charges.
Hot Definitions
  1. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  2. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Absolute Advantage

    The ability of a country, individual, company or region to produce a good or service at a lower cost per unit than the cost ...
  5. Nonce

    Nonce is a number added to a hashed block, that, when rehashed, meets the difficulty level restrictions.
  6. Coupon

    The annual interest rate paid on a bond, expressed as a percentage of the face value. It is also referred to as the "coupon ...
Trading Center