Definition:

An index fund is a type of investment portfolio, managed by an investment manager to track a specific market index, like the S&P 500. The portfolio holdings are weighted to track and match the holdings, as well as the performance, of a specific index as closely as possible.

Example:

She invested most of her 401K in an S&P 500 Index Fund.

More information:

Index funds are considered passive investment strategies, given they are simply replicating the weights of a market index, and as such, should have low management fees.

As most actively managed portfolios fail to consistently beat the market index, and charge higher fees, many investors like to invest in index funds for their low fees, long-term market returns, and diversification benefits.

While the S&P 500 is the most popular Index Fund and tracks the 500 largest stocks in the US market, there are many other options as well, both globally and even across other asset classes, like bonds:

  • Nasdaq funds track the 3,000 stocks traded on the Nasdaq, which tend to have a heavier technology bent
  • Russell 1000 tracks the 1,000 largest stocks in the US
  • Russell 2000 tracks the next 2,000 stocks in the US, or small caps
  • MSCI World tracks stock market indices globally
  • Barclays Capital U.S. Aggregate Bond Index tracks the bond market
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