Index Fund

A mutual fund that seeks to passively match the performance of some market index, most often the Standard & Poor's 500. Index investing is based on the theory that all information about stocks is known and discounted in market prices and that, over the long haul, it is virtually impossible for an active manager, hampered by the expenses of running a fund, to beat a broad market indicator. In fact, indexing has become extremely popular in recent years as investors have noticed how frequently the S&P 500 has trounced actively managed funds. One reason is that index funds have very low expenses, since there are no high-priced analysts or stock-pickers needed. Another reason is that index funds do very little trading, which saves commissions (not to mention capital gains taxes). A third reason, specific to the S&P 500, is that in recent years the kind of large American companies that make up the index have outperformed other kinds of stocks. But indexing has spread far beyond the S&P 500. There are now index funds for small-cap stocks, international stocks, corporate bonds and other categories of investing, all offering simply to match the market. The key to choosing an index fund is to pick the one with the lowest fees.



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