Which type of investment does an index fund mimic?

An index fund is designed to replicate the performance of a specific market index, such as the S&P 500 or the TSX Composite Index. This type of investment aims to mirror the returns of the entire market or a specific segment of the market by holding the same stocks in the same proportions as the index it tracks.

When investors choose an index fund, they are typically looking for broad market exposure with lower fees compared to actively managed funds. This is because index funds do not require a team of analysts or fund managers to select individual investments; instead, the fund is passively managed to reflect the index’s performance.

Mimicking a specific stock, a bond portfolio, or the selection made by a mutual fund manager would not align with the fundamental purpose and operational structure of an index fund. Hence, the correct choice of a market index clearly captures the essence of index funds and their investment philosophy.