UK Accounting Glossary
An index fund is a portfolio of assets with allocation rules that remain fixed regardless of market conditions, commonly for the purpose of approximating the performance of some market index, such as the Russell 2000 Index. The index fund does not have to be linked to an existing index. Typically, an index fund is either a mutual fund or an exchange-traded fund (ETF). John Bogle of the Vanguard Group proposed the index fund concept in 1975. They issued the first index fund, which matched the composition of the S&P 500. An index fund tends to have significantly lower fees and expenses than an actively managed fund because of its passive management style. Taxes are also reduced because less trading lowers realized capital gains for the index fund. Consequently, the typical index fund has outperformed the average of comparable actively managed funds by more than Bogle had originally anticipated. Even legendary fund manager Peter Lynch has stated that in most case an actively managed fund provides “no advantage” over an index fund.
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This glossary post was last updated: 9th February 2020.