As blockchain technology and cryptocurrency markets continue to grow and mature, there will be a steady increase of capital coming into crypto markets. As such, there will also be a need to provide investment products and services dedicated to cryptocurrencies. While many of these products may be new, they will inevitably reflect traditional asset management in many ways. One of these ways is the emergence of cryptocurrency index funds in the market.

Before we dive deep into cryptocurrecy index funds, let’s start from beginning - What are index funds and how do they work?

What are Index Funds?

In traditional financial markets, an index is comprised of a portfolio of assets which represents the statistical change of the measured market. An index can be derived from a number of parameters such as price, market cap, and past performance. Examples of well-know stock indexes include Standard & Poor's 500 Index (S&P 500) , Dow Jones Industrial Average (DJIA), and the NASDAQ Composite.

An index fund consists of assets allocated in the same ratio as the targeted stock index, with the goal of mimicking the stock index performance. For instance, the largest index fund in the world, Vanguard 500 (VFIAX), is constructed to track the performance of the S&P 500, and replicates its portfolio and asset ratios based on the stocks that make up the S&P 500.

According to Investopedia, the goal of an index fund is “to provide broad market exposure, low operating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets.”