Index Funds Key Terms

Learn about investing and trading index funds

By Terri Deno

Index funds are specific types of mutual fund that look to match the overall performance of a specific market index. Index funds are normally managed in a passive way. because. with the lower tax and investment expenses of index funds, most can outperform other types of actively managed mutual funds. An index fund can see this type of success, because the fund holds a larger variety of investments to get a better sample of the companies within a specific index.

Capital gains

Capital gains (or losses) are incurred by a fund whenever the fund sells a stock. Because of yearly capital gains taxes, many funds do not invest the total amount of fund assets
Try: Index Funds provides information on the efficiency of these funds regarding capital gains taxes.

Passive investing

Passive investing is an investing strategy that looks for the best long-term investments. With passive investing in index funds, fund managers limit the amount of buying and selling, but still maintain a diverse portfolio.
Try: Investopedia provides information on how a passive approach in investing with index funds can outperform actively managed mutual funds.

Morningstar style box

The Morningstar style box is grid that breaks down stocks and funds into small, medium and large cap investments. This allows you to compare mutual funds and find the relevant index fund.
Try: Morningstar provides an explanation of the style box and how it works to find investment information for stocks and funds.

Statement of additional information (SAI)

A statement of additional information is a statement that provides additional financial and corporate details on the company that issues the fund. The SAI can be found through the investment company or through the Securities and Exchange Commission.
Try: The Securities and Exchange Commission provides a list of documents that can be requested by investors including SAIs, shareholder reports and fund profiles.

Turnover

The turnover rate of an index fund is the measurement of how long an index fund can hold on to a stock. The longer a stock is held in a fund, the fewer turnovers a fund will see. This reduces the capital gains taxes imposed on the fund.
Try: Moneychimp provides information on the turnover rate for index fund portfolios.

Enhanced index fund (EIF)

An enhanced index fund is one type of index fund that is actively managed. These funds are managed to beat the returns of the tracking index. EIFs sometimes provide a better return than a traditional index fund, but come with more risk.
Try: Dimensional Fund Advisors compares traditional index funds and enhanced index funds.