Funds
Index Fund
An index fund tracks a defined market index instead of trying to beat it.
An index fund buys the constituents of an index, in something close to the index weights, and charges a small fee to do it. The promise is the market return minus that fee, not a manager's opinion. Most active managers, after fees, do not beat that result over long periods. That is an empirical observation, not a law that the next decade must repeat, and it is why index funds became the default core holding.
The choice that remains is which index. A total-market fund, an S&P 500 fund, and a tech-sector fund are all 'index funds' and they are not the same bet. Read the methodology: market-cap weighting concentrates you in the largest winners, which is a feature until those winners are the risk. ETFs are the usual wrapper. The learn page on ETFs covers how the wrapper trades.
Formula
An index fund holds the securities in a published index, in index weights, instead of picking winners.
Live example
Apple Inc. (AAPL) last printed at $345.33 with a market cap of $5.04T. If this symbol is a fund, the price is the tradable quote. Compare it with the holdings' value and the expense ratio before treating a one-day move as the return.
Related
ETF (Exchange-Traded Fund) · Expense Ratio · Market Cap
See it on a list: best stocks · screener
Questions
Are index funds always passive?
The portfolio follows rules. The rules can be aggressive: a momentum index or a single-industry index is still an index, and it is an active bet in disguise.
Mutual fund or ETF?
Same idea, different plumbing. ETFs trade all day and are often more tax-efficient in the US. Mutual funds trade at end-of-day NAV.