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Description of Index Fund. Explanation.


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Definition Index Fund. Description.

An Index Fund is a mutual fund or exchange-traded fund that mirrors its portfolio to that of a particular index, such as the DJIA, NASDAQ, Hang Seng Index or the S&P 500. The target is that its performance matches the performance of a the index.

They do not necessarily have to own all of the securities making up the index in the same composition; statistical sampling can be used.

Index funds assume that it is impossible to consistently outperform the market anyway because of Efficient Market Theory, so it is better to keep the costs low. Index Funds do that, because they are passively managed and do not require highly educated professional strategists and financial experts, since they merely mirror an index.

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