Index funds are usually a good means for diversification. There is some active management in index funds, but usually not as much as a regular mutual fund. They are very popular because of their history of low expenses, in comparison to their peers.

Consider the fact that index funds are made of stocks, bonds, or other investment instruments they represent. It is true you cannot actually buy an index such as the S & P 400 Midcap or the Lehman Brother Aggregate Bond Index. When you do purchase an index fund, your money manager is buying the securities inside a mutual fund that include these securities.

Unlike normal mutual funds, index funds often do not have as much turnover. The money manager usually makes changes in the index, as a result of needed cash in the fund, or securities moving in or out of the followed index. Traditionally, an index fund does not change securities often, unless there is a collapse in fundamentals of the stock or bond, or the stock is too large for the index.

Due to the hands-off approach to managing index funds, these funds usually have lower expenses. There is less trading within the fund, therefore the money manager has a passive role in managing it. Each index fund represents one of the indexes such as the Russell 2000 or the Morgan Stanley EAFE index. Their popularity will remain as long as the expenses are kept low and there is not as much turnover.

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