How do you invest in an index?
An index is a measurement of a group of securities according to rules. It is not a security you buy directly.
To get exposure to an index you can buy units in a fund that tries to track it. The fund can be a passive mutual fund or an ETF. Not every fund follows the same index, and not every index is equally diversified. Check the benchmark index in the fund documents, the holdings, costs and currency risk. The fund’s return can differ from the index return, among other things because of costs and the tracking method.
The S&P 500 is an index. VTI in the exercise is an ETF that tracks the broad U.S. stock market, and not an S&P 500 fund. The product name and benchmark index are not the same thing.
Find on the market screen a product labeled “index” and a product labeled “ETF”, and explain what can be bought in the exercise.
Investor.gov · Exchange-Traded Funds ↗Check your understanding
What do you buy to invest following an index?
- The number of index points
- Units of a product that tracks it
- The exchange’s website
Answer and explanation
Units of a product that tracks it. The index is a measurement. A tracking product provides exposure to investments according to its policy.
Does every U.S. stock fund track the S&P 500?
- Yes
- No, check the benchmark index
- Only when the price rises
Answer and explanation
No, check the benchmark index. There are different indices and funds with different policies. Do not infer from a general name alone.
Continue learning
ETF, index-tracking fund and money market fund — A fund pools investors’ money and invests according to a policy. “Tracking” describes the method; “ETF” also describes the way it is traded.
Buying on the screen to understand the operation — A buy order is a request to execute a trade. Sending an order is not always the same as executing a trade.