What does it mean for an index fund to “track the S&P 500”?
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More like an ELI15:
The S&P 500 index tracks 500 select stocks weighted by market capitalization, which is the total number of shares the company has issued times the stock price. So, for example, AAPL may represent 1.00% of the index. If AAPL’s stock price moves up a little bit and all the other 499 stay the same, AAPL may now represent 1.01% of the index.
The S&P 500 isn’t a product you can invest in; it’s a metric calculated by Standard and Poor (S&P). So many companies create their own product (ETF, mutual fund) to mimic the S&P 500 as closely as possible. This requires regular buying and selling of the 500 stocks to keep track as closely as possible with the changing market capitalizations (read: stock price) of the 500 stocks. E.g., in the AAPL example above, the fund manager would need to buy more AAPL stock to reflect its larger representation of the index. Note that such buying and selling that the fund manager is doing is not because of their views of the value of the stocks but merely to track the index as closely as possible. This is an index (or passive) fund.
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