Definition
A mutual fund or ETF that tries to match the performance of a market index by holding the same investments.
What it means
An index fund follows a set list of securities, such as a broad U.S. stock market index, rather than having managers choose investments. Because it does not try to beat the market, it usually has lower costs and lower turnover than actively managed funds. An index fund will rise and fall with its index, so it is not protected from market drops; tracking error means its returns can differ slightly from the index. Funds that track the same index can still charge different fees, so comparing expense ratios matters. The SEC's Investor.gov notes that low costs can make a meaningful difference over many years. Many target-date and retirement plan funds are built from index funds. Some indexes are narrow, so an index fund is not automatically diversified.
Example
If two funds track the same index and earn 7% before costs, $20,000 grows to about $76,700 over 20 years at a 0.05% fee and about $70,500 at a 0.50% fee.
Illustrative numbers only. Your situation will differ.