Funds & ETFs
A fund pools money from many investors and buys a basket of assets. An ETF, an exchange-traded fund, is a fund whose units trade on a stock exchange like a share.
Why they exist
Buying 500 companies one by one is expensive and slow. A fund does it for you. Index funds simply copy a market, such as the S&P 500, at very low cost. Active funds pay a manager to try to beat it, and most do not after fees over long periods, according to S&P's long-running SPIVA reports.
What to look at
- What it holds. A "technology" ETF and a world index ETF behave very differently.
- Cost, shown as the total expense ratio per year.
- Whether it holds the assets directly or copies them with derivatives.
- Size and trading volume, which affect how easily you can buy and sell.
How it can hurt you
A fund is only as safe as what is inside it. An ETF on a single sector or a leveraged ETF can fall far faster than the wider market. Leveraged and inverse ETFs reset daily and can lose money over time even when the market ends where it started.
The rhyme
The investment trusts of 1929Pooled funds are not new. In the late 1920s, investment trusts let ordinary Americans buy a slice of a diversified portfolio. Many were built on borrowed money, and some trusts owned other trusts. When the market broke in 1929, that leverage multiplied the losses and some trusts were nearly wiped out. The lesson carried into today's rules, and into the modern index fund: Vanguard launched the first one for the public in 1976, and the first US ETF, the SPDR S&P 500, listed in 1993.
Terms you will hear
- Index fund
- A fund that copies a market index instead of picking stocks.
- Expense ratio
- The yearly fee, as a percentage of what you invest.
- Accumulating / distributing
- Whether the fund reinvests dividends or pays them out.
- Tracking difference
- How far the fund's return differs from the index it copies.
- Leveraged ETF
- A fund that aims for a multiple of the daily index move. Built for short-term trading.
Educational content only. Not a recommendation to buy or sell. Past performance does not indicate future results.