Q&A: Index funds
Question: I have been researching the definition of an “index fund” and I’m coming up with some conflicts. Some articles use index fund and mutual fund to indicate the same thing – a separate entity from an ETF – while others define an index fund as either a mutual fund or an ETF. Also, some articles give investment suggestions and simply indicate that the fund is an index fund. How can I tell in those instances if the fund is a mutual fund or an ETF? Thanks for helping to clear this up. – Charles
Gordon Pape answers: The issue is whether a fund is actively managed or passively tracks an index. In the former case, the manager makes the buy/sell decisions, which may bear no relationship to any index. Passive funds simply replicate the performance of a benchmark index, less expenses, with no input on the part of the manager, hence the term “index fund”. By definition, ETFs are supposed to be index funds although some are now actively managed. Most mutual funds have active management but there are some index funds available as well.
When you see a reference to an index fund in the media, there will usually be a ticker symbol accompanying it if the fund is an ETF. If there is no symbol, it is probably a mutual fund.