Distinguish in the market between a stock, an ETF and an index for observation.
A fund pools investors’ money and invests it according to a defined policy.
An index measures the performance of a group of assets. An index-tracking fund tries to follow an index; an ETF trades on the exchange during trading hours. The risk depends on what the fund holds. A single-sector fund is not necessarily well diversified.
The S&P 500 is a stock index. You can learn about it, but you cannot buy the index itself as a stock; there are products that track it.
Distinguish in the market between a stock, an ETF and an index for observation.
An imaginary index describes three companies. The index is a measurement rule, not an account holding your money. A fund seeking to track it holds assets according to its policy and has its own costs. Its unit performance therefore need not exactly match the index. Before comparing the two, identify what the index measures, how the fund tracks it and what the displayed return includes.
Concepts that help you compare
How does one fund unit represent a basket of stocks?
A unit in a fund gives a proportional share of a fund that holds assets; it is not one share in each company. The fund pools money and holds a basket according to its policy. One unit gives proportional exposure to the basket, even if each company's weight differs. The number of units you own is not the number of companies in the fund. The basket can include stocks, bonds or other assets. A fund can track an index or be actively managed. Read the investment policy and holdings—not just the name.
Comparison example: A fictional fund holds 60% in Company A and 40% in Company B. A holding valued at 100 ₪ in the fund roughly represents exposure of 60 and 40 ₪, before cash, costs and pricing differences.
An index can weight companies by market cap, price or equal weight. A large number of companies does not guarantee balanced diversification. In a market-cap-weighted index, larger companies can have greater influence; sometimes only freely tradable shares are used and weight caps apply. In an equal-weight index, company weights are equal at rebalancing dates and then change with prices. An index is a measurement tool; to get exposure you can use a tracking product, whose results may deviate due to costs and tracking error.
Comparison example: In a fictional basket, Company A at 80% weight rises 10% and Company B at 20% weight falls 10%. Assuming initial fixed weights and no costs, the basket change is 0.8×10% − 0.2×10% = 6%.