Over 700 finance terms, Shmooped to perfection.
Index Funds vs. ETFs One key elemental thing worth understanding is the difference between index funds and exchange traded funds. Index funds are NAV beasts - that is, each day, an uber-bean-counter adds up the stocks and/or bonds in a fund and calculates its value. Periodically (monthly-ish), the fund manager rebalances the fund. Let's say that a company in the S&P 500 is acquired by another or (more poignant lately), goes bankrupt. Well, it has to be replaced in the index. Or let's say a stock has a monster run and gets huge - should Apple still be 16% of the QQQQ index? Is that reflective of a NASDAQ portfolio? (AAPL is currently about 5% of the NASDAQ composite). It depends on the original documentation of the fund and the fund manager's job is to rebalance" over time.
ETFs (exchange-traded funds) don't do this. They are a set basket of stocks, which just live on more or less indefinitely, drifting away from their original indices as various stocks perform differently from the market and weightings change - sometimes dramatically over time.