Index Fund

Financial Dictionary -> Investing -> Index Fund

An index fund is a special form of mutual fund that tracks a market index via its portfolio. An example of this is the Standard and Poor's 500 Index (S & P 500) that tracks the components of its index. Index funds are advertised for having a wide market exposure, very low operating costs and not much portfolio turnover.

A person that takes part in index funds is known as indexing, which is considered a submissive method of managing funds, which have been outperforming that of overtly managed mutual funds successfully.

Although the most common index funds monitor the S&P 500 as mentioned, there are several other indexes, which include the Russell 2000 (operating for smaller companies), the DJ Wilshire 5000, the MSCI EAFE (for foreign stocks, such as those in Australasia, the Far East or Europe) and the Lehman Aggregate Bond Index (which tracks the total Bond market).

Getting in to index funds is considered a method of latent and downright lazy investing, with the main benefit of the strategy being to lower the expense ratio on the index fund associated with management. Transactions are infrequent and decisions are often automatic, which adds to the savings. Plus they also offer lower taxes in accounts that are taxable. However on top of this, most of the mutual funds end up not to beating the broad indexes, like the Standard and Poor's 500 Index and money saved in management often evens out with the lack of return on the investment. Just by design, index funds aim to match rather than do better than the target index.