An Easy Guide To Index Funds, ETFs and Mutual Funds

It can all be confusing: Indexes, ETFs, Mutual Funds, Index ETFs, Index Mutual Funds. What the heck is all the difference?

So What Exactly Is An ETF (Exchange Traded Fund)?

Everyone knows that we can buy individual stocks. We also know that we can buy a collection of stocks, known as Mutual Funds. But now with ETFs, you can buy a collection of stocks that trade like stocks. You see, mutual funds don’t trade like stocks. They are bought and sold only once at the end of the day.

Ok great, now we know ETFs are a collection of stocks, and they don’t trade like Mutual Funds…

ETFs on the other hand can be bought and sold throughout the day like regular stocks. ETFs are usually cheaper than mutual funds but ETFs still have brokerage, operating expenses and management fees. One more thing about ETFs…they can track an entire index, or they can track a specific sector (tech, health, real estate)

So now we know ETFs can trade throughout the day and still have expenses…

ETF Index Funds

Remember how an ETF was a collection of stocks? Well an ETF Index Fund is a collection of stocks that tries to mimic the market (a big index). Some big Indexes you already know: SP500, DOW, NASDAQ. You can’t buy these, they are just trackers, but if you buy an ETF Index you can mirror them. The purpose of index investing is to diversify your holdings, reduce risk and basically get market return. So if you want to make market returns on your money for the long term, buy an index ETF and sit back. The market usually receives 10% to 12% a year.

What Are The Different Types of ETFs Out There?

Market ETFs – They track the market as a whole, think SP500 or NASDAQ

Sector ETFs – You can invest in Tech, or Oil, or BioTech or Pharmaceuticals

Bond ETFs – US Treasury, corporate, municipal etc

Commodity ETFs – Invest in Gold, Silver, Copper, Oil

Alternative Investment ETFs – Private Equity, Hedge Funds, VCs, Real Estate Development.

If You Are Still Confused…Just Remember This…

Stocks: An individual company that you buy a share in

Fund: A collection of stocks

Mutual Funds: A collection of stocks that can be traded once a day

Index Funds: Usually a mutual fund that tracks indexes (markets), can be traded once a day

ETFs: A collection of stocks that can be traded multiple times a day

Index ETFs: A collection of stocks that can be traded multiple times a day, which also mimics a market or sector

 

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