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Index fund

An index fund is a mutual fund or exchange-traded fund (ETF) that tries to match the return of a specific market index, such as a broad U.S. stock index, by holding all or a representative sample of the investments in that index.

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How it works

An index is a measuring stick, not something you can buy directly: it tracks the value of a defined basket of stocks or bonds. Many indexes weight each holding by its total market value, so the largest companies count the most. An index fund copies that basket, either by owning everything in it or a sample chosen to behave similarly. Because it follows a rule instead of picking investments, the approach is usually called passive.

Following an index can hold down costs, since the manager doesn’t pay analysts to select securities, but not every index fund is inexpensive, so the expense ratio is still worth comparing. The fund’s return will usually differ a little from the index because of fees, trading costs, and imperfect tracking. It also carries the same market risk as its holdings: when the index falls, the fund falls with it.

What an index fund owns depends entirely on its index. A fund that follows a broad stock index spreads money across many companies, while one that follows a single sector can be concentrated. Useful questions before buying include which index the fund tracks, how that index is built, what the fund costs, and whether it is structured as a mutual fund or an ETF.

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Sources and further reading

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.

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