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Index Fund
A mutual fund that is invested according to an “index,” or statistical measure of change in a securities market. A popular index is the S&P 500, which is a compilation of 500 large U.S. companies. Standard & Poor’s determines this index’s holdings, making changes as needed due to market events (e.g. a bankruptcy or merger). It is a market-weighted index, where the amount of each company in the index is proportionate to its value in the market. If you think of the index as a shopping list, all S&P 500 index fund managers buy using this same list.
The only difference between two index funds tracking the same index is their expense ratio. Index funds with more efficient trading techniques or more assets to manage can charge less than a smaller or less-efficient fund. As index funds are not trying to “beat” the market, they should have lower research and personnel costs than an actively managed fund.
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