Financial Industry Regulatory Authority (FINRA) Practice Exam 2025 - Free FINRA Practice Questions and Study Guide

Question: 1 / 400

What advantage do index funds typically offer?

Protection of principal during bearish markets

High turnover to capitalize on market opportunities

Higher management fees due to active management

Lower management fees due to passive management

Index funds are designed to track the performance of a specific market index, such as the S&P 500. One of the main advantages they offer is lower management fees due to their passive management approach. Unlike actively managed funds, which require fund managers to make individual investment decisions and frequently buy and sell securities to outperform the market, index funds simply replicate the makeup of a particular index. This means they incur lower trading costs, and the management team spends less time and resources researching and making investment decisions. As a result, the management fees associated with index funds are generally much lower than those of actively managed funds, making them an attractive option for cost-conscious investors. This cost efficiency can lead to higher net returns for investors over time, particularly in a long-term investment strategy.

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