Index Funds and ETFs

Managing individual stocks requires research, daily monitoring, and therefore, time. They can be volatile and choosing them can be risky. One way to overcome this risk is diversification, the idea of spreading your investments across many businesses, industries, and geographies. When you diversify, even if one stock or industry goes down, another one may go up, and you will be less impacted overall by a downturn.

What Index Funds Are: An index is a collection of companies representing a portion of the market. For example, the S&P 500 includes 500 of the largest U.S. companies.

If you buy an index fund, your investments are automatically spread across all the companies within an index. Instead of selecting individual stocks, you own small pieces of hundreds of companies at the same time.

What an ETF Is: An exchange-traded fund (ETF) allows you to buy and sell an index fund throughout the day through a brokerage account, just like a stock. When you buy one share of an S&P 500 ETF, you gain instant exposure to a broad range of U.S. companies.

Historically, the market has delivered strong returns. Research shows that most professional stock pickers fail to outperform broad market indexes over time. Accepting average market returns often yields higher returns than trying to pick individual winners does.