Investing 101

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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