Funds, ETFs, and Index Funds — slides
Financial Literacy Club
Investing · Lesson 4
Funds, ETFs, and Index Funds
Pooled investing, and how fees quietly add up.
14-minute lesson · learnwithflc.org
Funds, ETFs, and Index Funds · 1 / 21
Financial Literacy Club
Investing · Lesson 4
Funds, ETFs, and Index Funds
Pooled investing, and how fees quietly add up.
14-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain how mutual funds and ETFs pool investors' money
- Describe what an index fund tracks
- Calculate the long-term cost of an expense ratio
Warm-up
Would you rather try to pick the one winning company, or own a tiny piece of 500 companies? Why?
Think, then write your answer.
The big idea
Funds, ETFs, and Index Funds
Pooled investing, and how fees quietly add up.
Investing · Lesson 4
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.
Investing · Lesson 4
- 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.
Vocabulary
Market index
A list that tracks part of the market. The S&P 500, for example, tracks about 500 large U.S. companies.
Investing · Lesson 4
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.
Vocabulary
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.
Investing · Lesson 4
Fees sound tiny, but they compound just like returns — in the wrong direction.
See it
With a hypothetical 7% yearly return for 30 years, $10,000 grows to about $76,123 with no fees, $75,063 with a 0.05% yearly fee, and $57,435 with a 1% yearly fee.
No fee
0.05% yearly fee
1% yearly fee
Real 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.
Try it together
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
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
- Your contributions
- Hypothetical growth
Show year-by-year tableHide table
| 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.
Activity · pairs · 10 min
Fee Face-Off
- Scenario: $10,000 invested for 30 years at a hypothetical 7% return before fees.
- Pairs compare three funds: 0.05%, 1%, and 2% expense ratios (use 6.95%, 6%, and 5% returns after fees).
- Pairs calculate or use the calculator to find each ending value and the dollar cost of the higher fees.
- Pairs write a one-line tip for choosing a fund.
Check for understanding · 1 of 3
What does an index fund try to do?
- APick the stocks that will beat the market
- BGuarantee a positive return every year
- CMatch the performance of a market index
- DInvest only in one company
C. Match the performance of a market index
Index funds track an index, like the S&P 500, instead of trying to beat it — which keeps costs low.
Check for understanding · 2 of 3
You have $5,000 in a fund with a 0.8% expense ratio.
About how much does the fund charge you this year?
- A$8
- B$40
- C$400
- D$0.80
B. $40
0.8% of $5,000 = $40. And it's charged every year, on a (hopefully) growing balance.
Check for understanding · 3 of 3
Because fees are small percentages, they don't matter much over decades.
- True
- False
False
Fees compound. Over 30 years, a 1% fee can reduce an ending balance by roughly a quarter.
Remember
Key takeaways
- 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.
Discuss
Talk it over
- Why do you think so many people pay for active management even though most funds trail their index?
- Where else in life do small, repeated fees add up?
Exit ticket
What does an index fund try to do?
Answer on your exit ticket before you leave.
Nice work today.
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learnwithflc.org/courses/investing/funds-etfs-index-funds
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