What an ETF and an index fund are, in plain words
An ETF is an exchange-traded fund: one security holding a basket of stocks. An index ETF tracks an index such as the S&P 500, so one share gives you a slice of all 500 companies. What matters most is which index it tracks and what it charges per year (the expense ratio).
The fund manager buys the index stocks in their index weights and issues fund shares. Those shares trade on the exchange like a stock, at a price close to the value of the basket.
One purchase gives you hundreds of companies: one bad stock barely moves the result, and you do not need to analyse each company.
The fund deducts a small annual percentage from its value. The gap between 0.03% and 0.5% looks tiny but over twenty years becomes a noticeable share of the return.
Broad market (S&P 500, NASDAQ 100, total US market), sectors (semiconductors, banks), bonds, gold, plus leveraged and inverse funds. The last two are for short-term trades; holding them long is dangerous.
- SPY (S&P 500) over 12 months: +8.8%
- QQQ (NASDAQ 100) over 12 months: +4.1%
- IWM (Russell 2000) over 12 months: +11.3%
FAQ
How is an ETF different from a stock?
A stock is a share in one company. An ETF is a share in a basket of companies.
SPY or VOO?
Both track the S&P 500. VOO has a lower fee; SPY is more liquid and popular with traders.
Read next
Ratings, the screener and signals are in the terminal.
Open the terminal