Through an index fund or ETF (exchange-traded fund), investors can gain exposure to a large number of the securities that make up an index, achieving an effect similar to broad diversification in a single transaction.
How it works
Rather than selecting individual securities, the fund is managed mechanically to track the performance of a specific index as closely as possible. This tends to require relatively little active management, and many such products carry lower ongoing management fees.
Benefits and points to keep in mind
Investing broadly across the market can reduce the risk tied to any individual security, but when the index itself declines, the whole portfolio declines along with it. Compared with other management styles such as active investing, neither approach is inherently superior — each has its own characteristics and points to keep in mind.