Indexes are also often used as benchmarks for the measurement of mutual fund and exchange-traded fund (ETF) performance. Many mutual funds, for example, compare their returns to the return in the Standard & Poor’s 500 to give investors a sense of how much more or less their executives earn on their money than they would make in an index fund.

“Indexing” is a type of management of passive funds. Instead of actively picking stocks and market timing for a fund portfolio manager, that is, choosing securities to invest in and strategizing when to buy and sell them, the fund manager creates a portfolio whose holdings reflect the securities of a particular index. The idea is that the fund will also match its performance by mimicking the profile of the index-the stock market as a whole or a broad segment of it.

Because you are unable to directly invest in an index, index funds are created to track their performance. These funds include securities that closely mimic those found in an index, allowing an investor, for a fee, to bet on their performance. The Vanguard S&P 500 ETF, which closely mirrors the S&P 500 index, is an example of a popular index fund.