Equity index funds would include groups of stocks with similar characteristics such as the size, value, profitability and/or geographic location of the companies. The most commonly known index fund in the United States, the S&P 500 Index Fund, is based on the rules established by S&P Dow Jones Indices for their S&P 500 Index.
Index funds may also have rules that screen for social and sustainable criteria.Īn index fund's rules of construction clearly identify the type of companies suitable for the fund. : 1244–45 Those rules may include tracking prominent indexes like the S&P 500 or the Dow Jones Industrial Average or implementation rules, such as tax-management, tracking error minimization, large block trading or patient/flexible trading strategies that allow for greater tracking error but lower market impact costs.
While index providers often emphasize that they are for-profit organizations, index providers have the ability to act as 'reluctant regulators' when determining which companies are suitable for an index. An index fund (also index tracker) is a mutual fund or exchange-traded fund (ETF) designed to follow certain preset rules so that it can replicate the performance ('track') of a specified basket of underlying investments.
