What Is an Index Fund?
An index fund is a mutual fund or ETF that aims to track the performance of a specific market index, such as a broad stock market index, by holding the same securities in similar proportions. Because it follows an index rather than relying on active stock selection, it is called passive investing, and costs are often lower.
Tracking Error
An index fund's return usually differs slightly from its index because of fees and trading costs; this gap is called tracking error.
How Indexes Are Built
Most broad stock indexes are market-capitalization weighted, meaning larger companies make up a larger share of the index. Other indexes use equal weighting or other rules, which changes what an index fund tracking them holds.
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Last updated: September 27, 2026. This definition is for general educational purposes only. It is not financial, investment, tax, legal, or medical advice, and it does not recommend any product or course of action. For decisions about your own situation, consult a qualified professional.