Funds, ETFs, and Index Funds — Investing

Step 1

The lesson

Buying dozens of individual stocks and bonds is expensive and time-consuming. Funds solve that: many investors pool their money, and the fund buys a large collection of investments.

Mutual funds: priced once a day, after the market closes.
ETFs (exchange-traded funds): trade on exchanges throughout the day, like stocks.
Index funds: mutual funds or ETFs that simply try to match a market index instead of picking winners.

Key term

Market index

A list that tracks part of the market. The S&P 500, for example, tracks about 500 large U.S. companies.

Actively managed funds pay professionals to try to beat the market. Index funds just follow it, so they're usually much cheaper. Research has repeatedly found that most active funds trail their index over long periods, after fees.

Key term

Expense ratio

The yearly fee a fund charges, as a percentage of your money. A 1% expense ratio costs $10 a year for every $1,000 invested — every year.

Fees sound tiny, but they compound just like returns — in the wrong direction.

Step 2

See it

$10,000 over 30 years at a hypothetical 7% returnHypothetical example

Step 3

Real-world example

The 1% that costs $18,000

Two friends each invest $10,000 for 30 years and earn the same hypothetical 7% before fees.

One picks a fund charging 0.05% a year: she ends with about $75,063.
The other picks a fund charging 1% a year: he ends with about $57,435.

Same investment, same market. The higher fee cost about $17,628. Before choosing any fund, look up its expense ratio.

Step 4

Try it: feel the fee

Run $10,000 for 30 years at 7%, then at 6%. That 1% gap is what a 1% fee does.

Your numbers

Starting amount

Monthly contribution

Time

Hypothetical annual return

Real returns vary year to year and can be negative.

Results

Hypothetical balance after 30 years

$81,165

Compounded monthly at a constant 7% a year

You contributed

$10,000

Hypothetical growth

$71,165

Growth share

88%

of the final balance

Show year-by-year table

Hypothetical balance by year
Year	Contributed	Growth	Balance
1	$10,000	$723	$10,723
2	$10,000	$1,498	$11,498
3	$10,000	$2,329	$12,329
4	$10,000	$3,221	$13,221
5	$10,000	$4,176	$14,176
6	$10,000	$5,201	$15,201
7	$10,000	$6,300	$16,300
8	$10,000	$7,478	$17,478
9	$10,000	$8,742	$18,742
10	$10,000	$10,097	$20,097
11	$10,000	$11,549	$21,549
12	$10,000	$13,107	$23,107
13	$10,000	$14,778	$24,778
14	$10,000	$16,569	$26,569
15	$10,000	$18,489	$28,489
16	$10,000	$20,549	$30,549
17	$10,000	$22,757	$32,757
18	$10,000	$25,125	$35,125
19	$10,000	$27,665	$37,665
20	$10,000	$30,387	$40,387
21	$10,000	$33,307	$43,307
22	$10,000	$36,438	$46,438
23	$10,000	$39,795	$49,795
24	$10,000	$43,394	$53,394
25	$10,000	$47,254	$57,254
26	$10,000	$51,393	$61,393
27	$10,000	$55,831	$65,831
28	$10,000	$60,590	$70,590
29	$10,000	$65,693	$75,693
30	$10,000	$71,165	$81,165

Educational calculator, not financial advice. Results are hypothetical estimates based on the numbers you enter.

Step 5

Knowledge check

Answer each question, then check your answer to see the explanation. Retake it as many times as you like.

Question 1 of 3

Step 6

Summary

Funds pool money to buy many investments at once. ETFs trade all day; mutual funds price once a day. Index funds match a market index at low cost, and most active funds have trailed their index over long periods after fees. Expense ratios compound, so small differences become big ones.

Step 7

What you should remember

Funds = instant variety in one purchase.
Index funds track a market index instead of picking winners.
Expense ratio = yearly fee as a % of your money.
A 1% fee can cost tens of thousands over decades.