Published On: Thu, Apr 4th, 2013

Index fund or Index ETF

An index fund is a passively managed type of mutual fund or ETF that is put together so that its performance mirrors or tracks the performance of a specific market index, such as the S&P 500 or other indexes including those for small companies, foreign markets or the total bond market.

It does this by owning the same stocks that index contains. One of the benefits of an index fund is called the efficient market hypothesis, which operates on the theory that the market is more efficient than any individual invest could ever be. Another benefit is lower expenses. Because index funds are passively, rather than actively managed, the expense ratios on index funds can be 1 – 2% lower than active funds.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.