An index fund is built to match the performance of a market index — such as the S&P 500 — rather than to beat it. Instead of a manager picking individual winners, the fund holds the same securities as the index in the same proportions, so its return tracks the market's return minus a small fee.
The appeal is cost and simplicity. With little active trading or research to pay for, index funds typically charge far less than actively managed funds, and decades of evidence show that most active managers fail to beat their benchmark after fees over the long run.
An index fund can be structured as a traditional mutual fund or as an ETF; the core idea is the same. It stays fully exposed to the market's ups and downs — tracking the index means falling with it in a downturn, too.
Worked example
An index fund tracking the S&P 500 aims to deliver that index's return minus a small fee, rather than trying to outguess it.
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This definition is general education, not investment advice. Markets — especially crypto — are volatile and you can lose money. Please read our disclaimer and see our methodology.