Index fund
Also called: tracker fund, passive fund, the haystack, tracker
A fund that holds everything in a defined market in proportion, instead of choosing what to buy.
An index is just a defined list — a country’s largest companies, or the world’s, or a whole bond market. An index fund holds that list, weighted by size, and changes only when the list changes.
Because nobody is researching or selecting, it is cheap to run. That is the concrete benefit, and over decades cost differences compound into very large sums.
It is not a clever product. It is the decision not to try to be clever, made cheaply and permanently — and much of why it works is that there is nothing to tinker with.
It does not protect you from market falls. It removes the risk of choosing the wrong company, not the risk of owning the market.
Words on this page
- Market — All the buyers and sellers of an asset together — nobody sets the price from above.
- Bond — A loan to a government or company that pays interest and returns the original amount at a set date.
- Risk — The chance that an outcome is permanently worse than you needed it to be.
Related terms
Covered properly in Learn.