Which statement best describes an index fund in practice?

Which statement best describes an index fund in practice?

• A. It is constructed to match the performance components of a market index through a rules-based approach
• B. It is actively managed to beat the market
• C. It excludes all ESG-compliant companies
• D. It changes holdings daily independent of the index

Answer: (A)

Index funds embody passive investing: they aim to track the performance of a market index by following a rules-based, replication approach. This means the fund holds the same securities in roughly the same weights as the index and rebalances as the index changes. The objective is to mirror the index’s return and risk, not to beat the market, which also keeps costs low and turnover modest. The description that fits this in practice is that it is constructed to match the performance components of a market index through a rules-based approach. Other statements describe active management, screening out ESGs, or trading holdings daily independent of the index—habits not aligned with how index funds operate.

Index funds embody passive investing: they aim to track the performance of a market index by following a rules-based, replication approach. This means the fund holds the same securities in roughly the same weights as the index and rebalances as the index changes. The objective is to mirror the index’s return and risk, not to beat the market, which also keeps costs low and turnover modest. The description that fits this in practice is that it is constructed to match the performance components of a market index through a rules-based approach. Other statements describe active management, screening out ESGs, or trading holdings daily independent of the index—habits not aligned with how index funds operate.