5 – L1 03 Indices Are Virtual Portfolios V2

An important point to keep in mind is that an index is a virtual portfolio, and not an actual fund that people invest in. We can think of an index has a fantasy football team in which sports fans pick their favorite players and put them in a virtual team. We can track the performance of this artificially constructed team by combining the performance metrics such as number of points scored for each player. But keep in mind that the team only exists in paper not in real life. There’s no team owner, no coach and the members in the virtual team don’t actually practice together. Similarly, an index represents the aggregated performance of a group of stocks. But they’re not funds they’re not managed by professional money managers, and investors don’t pay index creators to invest their money in the indices.