In passive investing, how does the fund's performance relate to the underlying index?

In passive investing, the primary strategy is to replicate the performance of a specific market index, such as the S&P 500 or the TSX Composite Index. This approach hinges on the belief that it is difficult to consistently outperform the market through active management and that investing in a representative index is a more reliable way to achieve long-term gains.

When a fund is designed to mirror an index, it typically holds the same securities in the same proportions as the index itself. This alignment allows the fund's performance to closely track that of the index, providing investors with the return that corresponds to broader market trends. Consequently, as the market index fluctuates due to market conditions, the fund experiences similar ups and downs, reflecting the collective performance of the securities within that index.

This mirroring of the index is key to the passive investing philosophy, aiming for market returns rather than attempting to beat the index through selective stock picking. By adhering to this strategy, investors can benefit from the overall growth and stability of the market, gaining exposure to a diversified portfolio without incurring the higher costs associated with active management.