3 Things You Need to Know About Index Funds and ETFs
Those of us who have invested directly in stocks know very well the sense of anxiety that comes along with it. Though we all know the importance of patience and perseverance when it comes to equities, they tend to go out the window once markets start tanking. And there is another challenge: You can buy only a limited number of stocks with a given amount of money, and most of us have only a limited amount of money to invest.
These two concerns can be easily addressed by instruments like index funds and Exchange Traded Funds (ETFs). Other investing options, such as mutual funds and some ETFs, are actively managed -- meaning that their portfolio composition keeps changing frequently. For our purpose, we will focus on index funds and index-tracking ETFs. They represent what is technically known as passive investing. Why passive? Because unlike a typical, actively-managed mutual fund, these two instruments do not change their portfolio a lot. They simply mirror an index, like the S&P 500, and their portfolio constitution changes only when the composition of the index does. For example, an ETF like SPDR S&P 500 ETF (NYSEMKT: SPY) will comprise the same number of stocks and in the same proportion as the S&P 500 index. These funds attempt to mimic the returns of the index they are mirroring.
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Source Fool.com
