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Finance Dictionary and Glossary of Investment Terms
A passively managed mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.
A portfolio of investments that are weighted the same as a stock-exchange index in order to mirror its performance. This process is also referred to as indexing.
Investment fund designed to match the returns on a stock market index. Mutual fund whose portfolio matches that of a broad-based index such as the S&P 500 and whose performance therefore mirrors the market as represented by that index.
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.