An index fund is a mutual fund or exchange-traded fund (ETF) that has the goal of replicating, before fees and expenses, the performance of a stock market index or bond market index by holding the same securities as the index in the same proportions or, in the case of synthetic ETFs, by holding derivatives that produce the same return as the index. Index funds use passive management; they merely mirror an index and do not use stock picking. Many notable investors have recommended investing in index funds due to their diversification, low fees, simplicity for asset allocation, and historical outperformance over funds that use active management, partially explained by the efficient market hypothesis. Index funds are used by both individual investors and institutional investors such as pension funds. Because index funds seek to replicate rather than outperform a benchmark, their objective is generally to minimize tracking error and investment costs rather than generate excess returns through security selection.