What are index funds and how do they work?

Index funds are a type of investment fund that seeks to track the performance of a specific market index, such as the S&P 500, by holding a portfolio of the same or similar securities as the index. The goal of an index fund is to provide investors with returns that closely match the performance of the index it tracks, rather than attempting to outperform the market through active management.

Index funds achieve this goal by using a passive investment strategy, which involves holding a diversified portfolio of securities that match the composition of the underlying index. Index funds typically have low fees and expenses compared to actively managed funds, as they do not require as much research and trading activity.

Index funds can be structured as mutual funds or exchangetraded funds (ETFs), and are available for a wide range of markets and sectors, such as largecap stocks, smallcap stocks, international stocks, and bond markets. They are often used as a core holding in a diversified investment portfolio.