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# Index Funds

An "indexfund" describes a type of mutualfund or unit investmenttrust (UIT) whose investment objective typically is to achieve approximatelythe same return as a particular marketindex, such as the S&P 500 Composite Stock Price Index, the Russell2000 Index or the Wilshire 5000 Total Market Index. An index fund will attemptto achieve its investment objective primarily by investing in the securities(stocks or bonds) of companies that are included in a selected index. Someindex funds may also use derivatives (such as options or futures) to helpachieve their investment objective. Some index funds invest in all of thecompanies included in an index; other index funds invest in a representativesample of the companies included in an index.

Themanagement of index funds is more "passive" than the management ofnon-index funds, because an index fund manager only needs to track a relativelyfixed index of securities. This usually translates into less trading of thefund’s portfolio, more favorable income tax consequences (lower realizedcapital gains), and lower feesand expenses than more actively managed funds.

Because theinvestment objectives, policies and strategies of an index fund require it topurchase primarily the securities contained in an index, the fund will besubject to the same general risks as the securities that are contained in theindex. Those general risks are discussed in the descriptions of stock funds and bond funds. In addition,because an index fund tracks the securities on a particular index, it may haveless flexibility than a non-index fund to react to price declines in thesecurities contained in the index.

Another type of investment companythat attempts to track the performance of a market index is an exchange-traded fund (ETF). ETFsare legally classified as either UITs or open-end companies, but they differfrom traditional UITs and open-end companies in a number of respects. Forexample, pursuant to SEC exemptive orders, shares issued by ETFs trade on asecondary market and are only redeemable in very large blocks (blocks of 50,000shares, for example). ETFs are not considered to be, and may not callthemselves, mutual funds.

Before investing in an index fund, you should carefully read all of the fund’s availableinformation, including its prospectus and most recent shareholder report. 

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