What Is Index Fund?
A fund that tracks a market index like the S&P 500, owning all its components.
The Full Definition
An index fund is a type of mutual fund or ETF designed to replicate the performance of a market index — like the S&P 500, the total stock market, or a specific sector. Instead of a fund manager trying to pick winning stocks, an index fund simply holds all (or a representative sample of) the stocks in the index. This passive approach results in dramatically lower fees, lower taxes, and — for most investors — better long-term performance than actively managed alternatives.
Real-World Example
A S&P 500 index fund owns tiny pieces of all 500 companies in the index. When Apple, Microsoft, and Amazon collectively grow, your fund grows. When the index drops, your fund drops. You get the market's return, minus a very small fee.