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Financial Literacy

Financial Literacy

Home Financial Literacy Investing 101 Index Funds v. ETF's

Index Funds v. ETF's

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-beancounter adds up the stocks and/or bonds in a fund and calculates its value. Periodically (monthly-ish), the fund manager rebalances the fund. That is, let’s say 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 AAPL still be 16% of the QQQQ index? Is that reflective of a NASDAQish portfolio? (AAPL is about 5% of NASDAQ). It depends. It’s 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.

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