Index-based mutual funds (index funds) and ETFs seek to track an underlying securities index and achieve returns that closely correspond to the performance of that index with low fees. They generally invest primarily in the component securities of the index and typically have lower management fees than actively managed funds. Some index funds may also use derivatives (such as options or futures) to help achieve their investment objective. Index-based funds with seemingly similar benchmarks can actually be entirely different and can deliver very different returns.
For example, some index funds invest in all of the companies included in an index; other index funds invest in a representative sample of the companies included in an index. Because an index fund tracks the securities on a particular index, it may have less flexibility than a non-index fund to react to price declines in the securities contained in the index. Also, because market indexes themselves have no expenses, even a passively managed index fund can underperform its index due to fees and taxes.
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