Issue link: https://read.uberflip.com/i/1511971
© 2023 SEI 2 What is an index fund? One cannot invest directly in an index. How then would an investor attempt to mimic the performance of an index? This can be achieved through investing in an index fund, which is a mutual fund or exchange-traded fund (ETF) with a portfolio that matches the components of a standard market index such as the S&P 500. This is often referred to as "passive" investing because it seeks to mirror the performance of an index and does not require active portfolio management. Index funds typically have lower expenses compared to actively managed funds. Sometimes, however, index funds can underperform the index they track. This can occur for many reasons. For example, as one cannot invest directly in an index, index returns do not reflect management fees, transaction costs, or other expenses typically incurred by investors in a fund. As such, index fund returns may be lower than the index they track because of fees deducted from the fund's overall returns. Investors' trading activity can also cause fund returns to diverge from the target index. As investors trade in an out of an index fund, they do so at prices that may lag the those of the actual index. Over time, this delay can accumulate into a measurable divergence between the fund and the target index.