What is an Index Fund?

An index fund is a mutual fund that is constructed to mirror the components of an index such as the S&P 500 (large companies).  Other indexes include the Russell 2000 (small companies), MSCI EAFE (foreign stocks in Europe, Australia, and the Far East), and the Lehman Aggregate Bond Index (total bond index).  By nature index funds encompass a passive investment style.  There is no active stock picking.  Stocks are deleted when they no longer are part of the index.  If, for example, a company grew from a small cap stock to one of the largest 500 companies in the US it would move out of the Russell 2000 index and into the S&P 500 Index.  Index funds are usually less expensive to own and more tax efficient than actively managed funds.