What may indexing result in, according to investment principles?

Indexing typically aims to create a portfolio that closely tracks the performance of a specific market index. This strategy involves investing in the same securities and in the same proportions as those found in the index itself. The goal is to replicate the index's performance rather than to outperform it.

When properly executed, indexing results in a portfolio that mirrors the index it is designed to track. Therefore, a well-constructed indexed portfolio will generally have a high correlation with its benchmark index. Significant deviations from the index may occur due to several factors, such as tracking error, which arises from differences in management styles, transaction costs, and the specific timing of trades.

Additionally, indexing is often associated with lower volatility in returns compared to actively managed portfolios since it reflects the diversified nature of the index, which absorbs individual stock fluctuations. Reduced transaction costs are also a primary benefit of indexing because it usually involves fewer trades than active management strategies.

In summary, the essence of indexing is creating a portfolio intended to match the performance of an index as closely as possible, making the assertion regarding a portfolio that does not accurately track the index less aligned with the principles of indexing. Indexing is fundamentally about achieving congruence with the index, underscoring the importance of understanding how portfolios can