How To Build An Index Fund

What Are Index Funds?

Index funds are a type of mutual fund or exchange-traded fund (ETF) that aims to replicate the performance of a specific market index such as the S&P 500. Unlike actively managed funds, where fund managers make individual security selections to try and outperform the market, the primary goal of an index fund is to match the returns of the designated index it tracks, rather than trying to outperform it.

The composition of an index fund’s portfolio mirrors the constituents of the underlying index it seeks to replicate. For example, if an index fund aims to track the S&P 500 index, it will hold shares of all the companies listed in the S&P 500, with each stock’s weight proportional to its representation in the index.