What Are Index Funds?
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What Are Index Funds?
Many investors wanting their investment portfolios to keep pace with the market choose index funds.
Things To Know
- Index funds try to match their reference market index.
- Index funds need little active management.
Why choose index funds?
An index fund is a mutual fund constructed to follow or emulate the performance of one of the market indexes.
Simply stated, index funds contain the securities that make up major market indexes. They do not try to beat the market. Instead, they try to match their reference market index. An index fund that tries to match an index would hold the same securities that are in that index. The fund may weight the number of shares for each company it owns in proportion to the share price or company capitalization. For example, it may buy more shares of a company whose share price is lower than one with a higher share price. Alternatively, it may buy more shares of a large company than of a small company regardless of share price. The fund’s prospectus describes the method of allocation. The fund may try to mimic the formula used in the index itself to achieve the same results as the index.
Low management
Index funds often use little to no active management. In many cases, computer-trading software dictates the portfolio allocation to match the chosen index. Buying and selling are infrequent when compared to funds with broader investment objectives because market indexes do not add or replace securities very often. As a result, portfolio turnover and management expenses are low.
Some commonly used indexes include the S&P 500, the Russell 2000, and Bloomberg US Aggregate Bond Index.
Learn more about the S&P 500.
Learn more about the Russell 2000.
Learn more about the Bloomberg US Aggregate Bond Index.
