Index funds and ETFs
Training 655 minutesindex funds
You are 29 and design apps for a living. Picking single stocks feels slow and scary. A coworker says: just buy the whole market.
Training goal: Choose a simple, low-cost fund
▶ Play this trainingSituation
1. An index fund copies the market: hundreds of companies in one purchase. An active fund promises to beat the market.
- Active: professionals run it
- Index: market return, low costs
- Neither, I will pick stocks myself
2. Two index funds track the same index. One charges 0.05% a year, the other 1.2%.
- Tiny difference, does not matter
- The pricey one must be better
- The cheap one: same holdings
3. There is a broad whole-market fund and a narrow fund on one trendy industry. The narrow one rose 60% last year.
- The broad fund as my core
- All in the trendy fund, it is rising
- Ten narrow theme funds
4. The fund is bought. A month later it is up 3%, then down 5%. What now?
- Switch funds weekly to chase trends
- Automate monthly buys and stop checking
- Sell if it is down by year end
What you will learn
- An index fund is the whole market in one purchase.
- Most active funds trail the index after fees.
- Pick a broad fund under 0.2% a year and leave it alone.
Your real-life step
Find the expense ratio of any fund and work out what it costs per year on $10,000.
Questions and answers
What is an index fund?
A fund that copies a market index instead of trying to beat it. That keeps fees low and diversification broad.
What is the difference between an ETF and an index fund?
An ETF trades on an exchange like a stock during the day. A traditional mutual fund prices once a day. Many ETFs are index funds too.
Are index funds good for beginners?
Yes, they are often called the best place to start: simple, cheap and broad. Market risk remains, so you need a long horizon.
More trainings in this module
Numbers are illustrative. A game, not financial advice.