What is an index fund?

An index fund is a mutual fund or ETF that tracks a market index — like the S&P 500 — by holding the same securities in roughly the same proportions, aiming to match (not beat) that index's performance.

A market index measures the performance of a defined basket of securities — stocks, bonds, or a mix — meant to represent a slice of the economy. An index fund's goal is to mirror that basket as closely as possible, not to outperform it.

Passive vs. active management

Index funds follow a passive investment strategy: a manager is not picking individual securities or trying to time the market. Instead, the fund buys and holds the components of the target index, rebalancing only when the index itself changes. Active funds employ managers who research and select securities to try to beat a benchmark.

How index funds track their index

Full replication: The fund buys every security in the index at its index weight.
Sampling: The fund holds a representative subset of the index — used when full replication is impractical (e.g., a broad bond index with thousands of issues).
Index funds may be structured as mutual funds, ETFs, or unit investment trusts (UITs).

Common index examples

Well-known indexes that funds track include the S&P 500 (500 large U.S. companies), the Russell 2000 (small-cap U.S. stocks), and the Wilshire 5000 (broad U.S. market). The SEC's Investor.gov notes a market index is meant to represent a sector of a stock market, or of an economy.

Index fund facts — SEC investor.gov

An index fund is a mutual fund or ETF that follows a passive strategy designed to achieve approximately the same return as a particular index, before fees. — SEC Investor.gov — Index Funds
Because index funds use a passive strategy, they may save costs — managers don't need research analysts to pick securities. — SEC Investor.gov
All investing involves risk, including possible loss of principal; index funds are not guaranteed against loss. — SEC Investor.gov

Key takeaways

An index fund holds the securities in a market index to match — not beat — that index's returns.
Passive management means lower trading activity than actively managed funds.
Index funds can be structured as mutual funds, ETFs, or UITs.
All investing involves risk, including possible loss of principal. This page is educational only.