What are index funds designed to do?

Index funds are designed to replicate the performance of a specific market index. This means that they aim to match the returns of the index they track, such as the S&P 500 or the TSX Composite, by holding a similar portfolio of investments that are included in that index. The primary purpose of an index fund is to provide investors with broad market exposure while maintaining a passive investment strategy, which often results in lower fees compared to actively managed funds.

This approach reflects a belief in efficient markets where it is difficult to consistently outperform the market through active management. By tracking an index, these funds benefit from diversification through a wide array of securities, which can mitigate the risks associated with individual stock performance. Thus, the goal is to achieve market returns rather than guaranteed returns or focused investments in lower-risk assets.