6.1.2.5 Index Funds 

Index funds are mutual funds set up to track the returns of a specific market index. An index contains a group of securities meant to represent a particular market segment.  

Well-known indexes include: 

-S&P 500 (500 large capitalization stocks) 

-Wilshire 5000 (total US stock market) 

-Russell 2000 (small capitalization stocks) 

-MSCI EAFE (foreign stocks)  

-Bloomberg Barclays US Aggregate Bond Index (total US bond market) 

-Nasdaq Composite (stocks listed on the Nasdaq exchange) 

-Dow Jones Industrial Average (30 large-cap, blue-chip stocks) 

An index fund will typically hold securities -- stocks or bonds-- in the same proportion as the index it is tracking. This means the fund’s investment adviser passively selects securities that will mimic the index, instead of actively buying or selling based on some type of analysis. The aim of the index fund is not to beat the market, it is simply to match the performance of the fund’s index. Because passive management doesn’t require human beings to make the investment decisions, and because tracking an index leads to fewer trades, costs for index funds are significa