Index Fund Definition
Written by True Tamplin, BSc, CEPF®
Updated on July 27, 2021
How Do You Define Index Fund?
An index fund is a variety of mutual fund that tracks the components of a financial market index.
The purpose of an index fund is to provide investors with broad market exposure at low operating expenses.
What Does Index Fund Mean In Finance?
The idea behind an index fund is that by compiling a portfolio of securities that mimics a market index, the portfolio will also match its performance.
Generally the relatively stable indices provide good long-term returns, however they are also more susceptible to market swings and crashes.
Index Fund Examples
Index funds are also passively managed, meaning that the portfolio manager does not actively buy and sell stocks.
This means that index funds usually come at a lower cost than buying equivalent securities individually would.
Some of the most widely used indices for index funds are:
- The S&P 500
- The Russell 2000, made up of small-cap company stocks
- The Wilshire 5000 Total Market Index, which is the largest US equities index
- The MSCI EAFE, which consists of foreign stocks from Europe, Australia, and Far East
- The Barclays Capital US Aggregate Bond Index, which follows the total bond market
- The NASDAQ Composite, comprised of over 3000 stocks listed on the NASDAQ exchange
- The Dow Jones Industrial Average (DJIA), which consists of 30 large-cap companies
Many expert investors, such as Warren Buffet, recommend index funds as a smart investment for retirees.
The low cost of entry combined with consistent low risk returns make them an ideal core holding for retirement accounts like an IRA or 401(k).