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Definition

index fund

Contributor(s): Matthew Haughn

An index fund is a type of mutual fund collection that follows the trend of a given security or market index, which represents a number of sectors of a market and offers comprehensive exposure to several markets.

Index funds increase and decrease in value relative to the market index that they track. Examples of market indexes include the Russell 2000, Dow Jones Industrial Average and the Standard and Poor 500 (S&P 500). These indexes are traded on all major exchanges and make up 20% of equity of mutual fund assets in the United States as of 2014.

Index funds were offered to the public after numerous financial publications noted that the performance of mutual funds, which consist of chosen stocks, failed to meet market averages. Prior to index funds, investors in mutual funds had no option to simply invest in the average of a market. Because performance is based off average market trends, index funds are seen as a type of passive investing. The diversity of funds calls for less active management, which causes a decrease in investor expenses as less is spent on fund managers, analysts and researchers to help in the stock selection process. Simplicity and lower cost are seen as significant advantages, especially for those new to investing.

The first index fund was made available by the mutual fund company The Vanguard Group in 1974, founded by John Bogle.

This was last updated in November 2018

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