How are indexes used? Index is a primarily used as a reference point for corresponding index funds any Index Fund in the form of a mutual fund or exchange traded fund known as an ETF must have an index that it is attempting to track if you were to invest in an S&P 500 Index Fund it goes without saying that the fund would be attempting to generate the same return as that of the S&P 500 Index. This may be attractive for investors who seek predictable tracking. Indexes can also be used as benchmarks for more targeted index funds which might have a sector or specific strategy influencing the construction of the index. This enables the investor to implement active views with regards to a particular sector or strategy at low cost without having to identify an active fund manager who operates using a similar sector or strategy Focus finally indexes are used as benchmarks for active funds active funds have the aim of beating the market and as such they use the index as a guidepost for the relative performance of their portfolio. However, they're not trying to mimic the performance of the index. They are trying to outperform The Benchmark and generate positive returns or Alpha through holding different weights or names and The Benchmark. However, this also introduces the risk that active funds could generate negative Alpha by underperforming the index.