What is an index fund?

Following a benchmark

An index fund is designed to track a specified market index.

Instead of a manager choosing individual investments based mainly on forecasts about which will perform best, the fund follows a defined index methodology.

How tracking works

The fund may hold all of the securities in the index or use a representative sample. As the index changes, the fund adjusts its holdings so that it continues to track the benchmark.

The fund's return will not normally be identical to the index because of fees, trading costs, taxes, timing and tracking differences.

Index fund versus ETF

The terms are related but not identical.

An index fund describes the investment approach: tracking an index.

An ETF describes a fund structure that trades on an exchange.

Many ETFs are index funds, but not every ETF is passive and not every index fund has to be an ETF.

Shariah-compliant index funds

A Shariah-compliant index fund follows an index whose eligible securities have been screened under a stated Islamic investment methodology.

The quality of the Shariah approach therefore depends on the index methodology and governance, not simply on the fact that the fund is passive.

This guide is general education, not personal financial advice.