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Index Funds vs. ETFs

If you're interested in investing in index funds, you're eventually going to run into the three letters ETF. ETFs (Exchange Traded Funds) are a type of index fund that doesn't rely on bean counting every 24 hours.

With the average index fund, a money guy will check on the bonds and stocks in a portfolio every so often and tally up their value. Every month or so, a fund manager will rebalance the fund by replacing any stocks or bonds that need to be replaced. Let's say that a company on the S&P 500 goes under and the fund tracks that index. The manager will have to replace it with another company (probably whatever company the S&P 500 has replaced the defunct company with).

ETFs say "ain't nobody got time for that," and don't spend extra effort adjusting and updating the stocks in the fund. ETFs are a group of stocks linked to an index (just like all index funds), but they just keep on mosey-ing along with no adjustment. No matter what happens on the index—and over time, plenty will happen—the ETFs carry on their way, eventually becoming really different from the index on which they are based.

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