ETFs and index funds

Funds that let you own many companies through a single investment.

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An ETF (exchange-traded fund) is a fund that holds a basket of investments and is bought and sold on the stock market like a single share. When you buy one share of an ETF, you own a small slice of everything inside it.

Index funds

Many ETFs follow an index, such as the S&P 500. Instead of choosing companies one by one, the fund holds the companies in the index in roughly the same proportions. These are often called index funds. Some index funds are ETFs; others are mutual funds bought directly from a fund company.

Why people use them

• Built-in diversification: one purchase can cover hundreds of companies.
• Simplicity: you don't need to research every company in the index.
• Low costs: many index funds charge small yearly fees, which matters over time because of compounding.

What to keep in mind

An ETF is only as diversified as what it holds: some focus on one industry, one country or one theme. Every fund charges a yearly fee, called the expense ratio, and fund prices still go up and down with the market. An index fund follows the market; it doesn't protect you from market declines.