Funds & wrappers
Index fund
Also called Tracker or Passive fund
A fund that aims to match an index rather than beat it, at very low cost.
How it works
Instead of choosing holdings, it buys the index constituents in their index proportions. The manager’s job is to minimise the gap to the index rather than to have views.
The case for it is arithmetic before it is empirical: all investors together hold the market, so in aggregate they earn the market return minus costs. Lower costs mechanically leave more.
Where it misleads people
An index fund is only as diversified as its index. A market-cap index in a concentrated market can have a very large share in a handful of companies, and buying it is buying that concentration.
Related terms
- IndexA rules-based list of securities used to represent a market or segment of one.
- Expense ratioThe annual percentage of your money a fund takes to cover its running costs.
- Tracking differenceThe plain gap between a fund’s return and its index’s return over a period.
- Active managementChoosing holdings deliberately in an attempt to beat a benchmark.
- Market capitalisationWhat the market says a whole company is worth: the share price multiplied by the number of shares.
Mentioned in
More in Funds & wrappers
- Investment trust
- Leveraged ETF
- High-water mark
- Mutual fund
- Hedge fund
- Net asset value
- Gating
- Performance fee
All 25 Funds & wrappers terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.