What is an index fund?

An index fund is a type of investment fund that aims to replicate the performance of a specific financial market index, such as the S&P 500 or the Dow Jones Industrial Average. This is achieved by constructing a portfolio that mirrors the composition and performance of the chosen index. The primary objective of an index fund is to provide investors with exposure to a broad segment of the market while minimizing costs.

Index funds are often known for their low expense ratios compared to actively managed funds because they do not require a team of analysts to make investment decisions. Instead, they simply follow the movements of the index. This passive management strategy aligns with the principle of investing in a diversified portfolio, which can help reduce risk while providing returns that mirror overall market performance.

Other options present distinctly different investment strategies or fund types that do not align with the definition of an index fund, such as focusing on emerging markets, being composed solely of high-yield bonds, or being actively managed funds with higher fees, which deviate from the fundamental nature of index funds.