ETFs & Indexes
Learn how ETFs, indexes, diversification, sectors, and expense ratios help investors understand broad market exposure.
What Is an ETF?
One Fund Can Hold Many Investments
An exchange-traded fund, or ETF, is an investment fund that trades on an exchange and can hold stocks, bonds, commodities, or other assets.
ETF
One fund investors can buy and sell like a stock.
Holdings
The investments owned inside the fund.
Exposure
The market, sector, region, or asset class the fund represents.
Buying one ETF can provide exposure to many investments at the same time.
What Is an Index?
A Benchmark That Tracks a Group of Investments
An index measures the performance of a selected group of investments. It is used as a benchmark for understanding how part of the market is performing.
S&P 500
Large U.S. Companies
Nasdaq Composite
Nasdaq-Listed Companies
Dow Jones
30 Large U.S. Companies
An index itself is a measurement. Investors usually gain exposure through products such as ETFs or index funds that track it.
ETF vs. Index
They Are Related, but They Are Not the Same
An index is a benchmark. An ETF is an investment product that may be designed to follow that benchmark.
Diversification
Spread Exposure Across More Than One Investment
Diversification spreads exposure across multiple companies, sectors, regions, or asset classes instead of relying on one investment.
Concentrated
A portfolio focused heavily on one company, industry, or theme may be more affected by problems in that area.
Diversified
Exposure spread across many investments can reduce dependence on the performance of one company or sector.
Diversification can reduce concentration risk, but it does not eliminate market risk.
Expense Ratios
What Does the Fund Cost Each Year?
The expense ratio is the annual operating cost of a fund, expressed as a percentage of the amount invested.
Investment
$10,000
Expense Ratio
0.20%
Approx. Annual Cost
$20
Lower fees leave more of the investment return with the investor, but cost should be considered together with what the fund owns and how it is managed.
Types of ETFs
Different Funds Provide Different Exposure
Broad Market
Tracks a large portion of the stock market.
Sector
Focuses on one industry such as technology or energy.
Bond
Holds government, corporate, or other fixed-income securities.
International
Provides exposure to companies outside the home country.
Commodity
Provides exposure related to commodities such as gold or oil.
Thematic
Focuses on a specific trend, technology, or investment theme.
Evaluating an ETF
Know What You Actually Own
Two ETFs can look similar while providing very different exposure.
Key Lesson
Before evaluating an ETF, understand what it owns, what it tracks, how concentrated it is, and what it costs.