Funds & ETFsGlossary
Index fund
An index fund is a mutual fund or ETF that aims to match a market index's return before fees. Plain-English definition, example and related terms.
Also called: passive fund, index mutual fund, index ETF
.jpg){kind=link}
Quick answer
An index fund is a mutual fund, ETF or unit investment trust that follows a passive strategy designed to earn approximately the same return as a particular market index, before fees, by holding the index's securities or a representative sample of them.
What does index fund mean?#
The SEC's Investor.gov glossary defines an index fund as a mutual fund, exchange-traded fund (ETF) or unit investment trust that follows a passive investment strategy designed to achieve approximately the same return as a particular index before fees[1]. It mainly buys the securities in the chosen index, and some funds use derivatives or hold a representative sample instead[1].
A market index is a measure of a basket of securities meant to represent a market or sector, such as the S&P 500 or the Russell 2000[2]. You cannot invest in an index directly; an index fund is the indirect route[2].
What does it look like with numbers?#
Worked example
$1,000 in an index fund for one year
Suppose the index rises 8.00% in a year — an illustrative figure, not a forecast. The index itself has no costs, so $1,000 tracking it perfectly would become $1,080.00. A fund with a 0.05% expense ratio ends at $1,079.50, ignoring other costs. The 50-cent gap is the fee.
| Item | Value |
|---|---|
| Index return (illustrative) | 8.00% |
| $1,000 at the index's return | $1,080.00 |
| $1,000 in the fund (0.05% expense ratio) | $1,079.50 |
| Gap caused by the fee | $0.50 |
Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.
Why does the term matter?#
Passive management usually means less trading, lower realized capital gains and lower fees and expenses than actively managed funds[1]. But an index fund carries the same general risks as the securities in its index, and fees, trading costs and tracking error can make it trail the index[2]. It may also have less flexibility than a non-index fund to react to price declines[3].
For the full explanation, including how cap weighting concentrates a fund, read index funds explained. For the indexes themselves, see stock market indexes, and for costs see expense ratio.
Sources
Numbers in brackets in the text point here. Grade A = primary source (regulator, statistics agency, law or official document).
- 1
- 2
- 3