What is a fund and what is an index?
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.
Investor.gov · Diversification and Asset Allocation ↗Check your understanding
Is every fund low risk?
- No, it depends on what it holds
- Yes
- Only if its name is short
Answer and explanation
No, it depends on what it holds. What matters are the assets, policy and exposures.
What does an index-tracking fund do?
- Guarantee outperformance of the market
- Try to follow an index
- Guarantee there will be no drops
Answer and explanation
Try to follow an index. Its aim is to track the index’s performance, subject to costs and tracking differences.
Continue learning
Why do prices change? — A market price is formed at the meeting point between buyers and sellers.
Risk: understanding what you can lose — Risk is the possibility that the outcome will be different from expected, including loss.
Diversification: more than one basket — Diversification is splitting investments among different assets and sectors.