What is an Index?

The Most Popular Indexes Are Names Most Have Heard

An index is a means by which to track the performance of a basket of securities through a standardized metric. There are various indexes that capture specific areas of the market and include names such as the S&P 500, Dow Jones Industrial Average(DJIA), Nasdaq, Russell 2000(RUT) and many others.

Fund Performance is Measured Against an Index

Depending on the specifics of the investment fund itself, an index will be used as the benchmark for the performance of the fund. This is especially true for mutual funds which are historically active in terms of management to show investors their returns compared to passive index. 

When a mutual fund has historically outperformed its benchmark (index) due to a proven fund manager, higher fees can often be justified.

Indexing is a low cost, passive investment strategy that has gained substantial popularity over the past few decades. Since one is not able to invest in an index directly, there are several ETFs now where the holdings look to mirror the index itself. 

Remember, most active fund managers do not actually outperform their respective index which is why passive investing has gained in popularity. Paying extra in fees to underperform a benchmark is hard to sell.  

However, it is not always just investment funds that are measured against an index, the return of an individual security(stock, bond, etc..) can also be measured against a specific index.