Q: What is an index fund?

A: An index fund seeks to replicate the performance of a specific index such as the S&P 500, which includes a representative sample of leading companies in leading industries that reflect the U.S. stock market. It seeks to mirror the index by holding the same securities. The goal of an index fund is to match the performance of the index that it is tracking.

However, the actual performance of the fund may be lower than the index it mirrors because of expenses associated with the fund. When looking at an index’s performance, you should consider that it does not reflect the deduction of any fees and charges that are associated with individual investments. Additionally, the past performance of indexes does not guarantee future performance of any investment.

Note: Indexes have no identifiable objectives, are not managed funds and cannot be purchased. Further, they are not intended to indicate the past or future performance of individual investments. 

Q: Why should an investor consider an index fund? 

A: Generally, index funds have lower fees than an actively managed fund since they have fewer transactions. Also, the objective of an index fund may be easier to understand: matching the performance of its benchmark index.

Index funds may be good choice for if you are interested in tracking the market.

Q: Why is index fund management considered "passive"?

A: The index fund manager does not actively choose the types of securities to include in an index fund. Rather, the index that the fund is tracking determines investment choices. The goal of the portfolio is to mirror the index.

The only reason to change the portfolio is if the index changes.

Q: How do you respond to volatile market conditions with index funds?

A: The discipline of the index fund manager does not change with market conditions. If the fund mirrors the index’s performance, it is reaching its goal.

If you prefer a long-term investment and are less concerned with short-term volatile conditions, an index fund may be a good choice.

Q: Does an index fund hold all of the securities in an index?

A: It depends on the size of the fund. It may not be practical for a smaller fund to purchase 100% of the funds available in an index. Smaller funds seek to mirror the index by holding those securities that account for most of the return of the index. 

When investing in an index fund, you should consider those securities that drive the performance of the index it mirrors.