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Why are index funds called index funds?

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Because they track an index.

Edited: The definition of the word in this case meaning "something used or serving to point out; a sign, token, or indication" from Meaning #3

I presume therefore you are asking what an index is?

There are many variations of what makes up an Index but in short it is a representation of some part of a market.

An extremely simplistic calculation would be to take a basket of stocks, and sum their prices. If one stock moves up a dollar, and one moves down a dollar, the index has effectively not changed, as it is presumed that the loss in one is offset by the gain in the other.

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  • I know what an index is, I just don't understand why it's named the way it is. I am not a native English speaker, so that may have something to do with it, but the way I understand the word index (from mathematics or computer science) doesn't explain to me why an index is named thus.
    – ripper234
    Mar 29, 2010 at 22:52
  • Added a definition link above: index points to something, in this case, using a subset of stocks to point to the overall performance of the market.
    – sdg
    Mar 30, 2010 at 12:46
  • @ripper234: Imagine the index at the back of the book, that points to the most relevant concepts in the book. Similarly, a stock index attempts to point at the most relevant stocks in the market, or a specific sector.
    – Chris W. Rea
    Mar 30, 2010 at 13:08
  • Indexes aren't managed?
    – Lowbrow
    Mar 31, 2018 at 19:10

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