Instrument
Index funds & ETFs
MidWhat it is
One purchase buys a slice of hundreds of assets at once. A traditional index fund is bought and sold through its manager at end-of-day prices; an ETF trades on the stock exchange all day like a share. Both track a market index rather than trying to beat it.
How to buy it
Open an account with any regulated broker in your country (see the investing-apps directory) and buy a broad, low-fee fund or ETF — local-market or international, depending on what your broker offers and your goals.
Pros
- Instant diversification across many companies or bonds
- Historically the most reliable way for beginners to own stocks/bonds long-term
- Low fees on the best options — cost is the main thing to compare
Cons
- Value fluctuates with the market — can fall meaningfully in the short term
- A high annual fee quietly erodes a large share of long-run returns
- Not suitable for money you need within a year or two
A worked example
The single number to watch is the annual fee. A fund charging 2% a year versus one charging 0.3% can differ by roughly a third of the total return over several decades, purely from cost — cheaper and broader almost always wins between two similar funds.
Frequently asked questions
What is the difference between a fund and an ETF, practically?
For a beginner, the deciding factors are cost and access, not the wrapper. Funds are simpler to set up as recurring automatic contributions in some countries; ETFs offer intraday pricing and can sometimes be cheaper. Compare the actual annual fee of each option available to you.
How much of a fund's past performance should I trust?
Past performance of an actively managed fund does not reliably predict future results — this is well documented. For a broad index fund/ETF, the more relevant question is simply: does it track its stated index cheaply and reliably?