What is an index fund?

An index fund is defined as a mutual fund designed to follow a specific benchmark or market index, such as the S&P 500. By investing in an index fund, investors essentially own a small piece of all the companies within that index, allowing for diversification with lower management fees compared to actively managed funds, which aim to outperform the market.

The structure of index funds is advantageous because they are passively managed, meaning the fund manager does not actively pick stocks but instead mirrors the holdings of the benchmark index. This approach generally leads to lower expense ratios and has been shown to yield competitive returns over time.

In contrast to the other options, the focus on real estate investments pertains to real estate investment trusts (REITs), which do not align with the definition of an index fund. Additionally, bonds are different financial instruments and do not represent the same risk or investment strategy as index funds. Lastly, while some index funds may focus on large-cap stocks, the term "index fund" encompasses a broader variety of funds, including those that track mid-cap, small-cap, international, or diverse sectors of the market. Therefore, the definition provided correctly captures the essence of what an index fund is.