The idea took hold. There are now 160 stock index funds available in two dozen investment categories. An index fund s return is the performance of the index, minus expenses to run the fund. The investor must always consider that annual expense ratio, how closely the fund actually follows the index and how tax efficient the fund is. Replicating an index can be done in a variety of ways.
Many funds buy all of the stocks in the same proportion that they are represented on the index.
Others buy the largest stocks in the index and a sampling of the smaller ones. In some cases, futures and other instruments are used to maximize performance. Keep in mind that funds using futures or parking their cash in bonds can generate income that will increase the taxes that the investor must pay. Theoretically, if they just tracked the index, such marginally better performance would be impossible. Understand the differences in indexes, for they ll perform differently in various types of markets.