Reference: Index Funds
In theory, this could be achieved simply by holding all of
the investments represented by the index, in the same proportions as
their representation in the index. Most importantly, because an index
fund is more diversified than a typical portfolio or fund, the risk is
lessened, thereby increasing overall performance in an upward market.
Passive management is a strategy where a fund manager makes
as few portfolio decisions as possible in order to minimise transaction
costs, including the incidence of capital gains tax. At the simplest,
an index fund is implemented by purchasing securities in the same
proportion as in the market index.
Its founder, John C. Bogle is credited with the creation of
the index fund. John Bogle did a study whereby he found around three
fourths of mutual funds do not earn more money than if they were to
invest in the largest 500 companies simultaneously, using the Standard
Poor's 500 stock index as a bogey.
A stock market index is a listing of stocks, and a
statistic reflecting the composite value of its components. Indices are
also a common basis for a related type of investment, the
exchange-traded fund or ETF. Unlike an index fund, which is priced
daily, an ETF is priced continuously, is optionable, and can be sold
short.
Index investing, also called indexing, is a method of
passive investing whereby a fund (or individual) buys the same stocks
in the same proportions as in a target index. The return achieved by
indexing is the return of the index.
His works include Index Mutual Funds: Profiting from an
Investment Revolution (1998) and The Prudent Investor Act: A Guide to
Understanding (2003).
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