Mutual funds – what are they?

When someone invests in a mutual fund, they (with other investors) create a pool of capital, which is then used and invested into a set portfolio, managed by fund managers. These funds have plenty of shapes and sizes – they might resemble an index, or might be built towards a different investment goal, like ESG.

ETFs – how different are they from mutual funds?

ETFs – or exchange-traded funds – works a bit differently. In such a situation, the underlying assets within an ETF are owned by someone else. This “someone” (another fund manager) creates a fund that tracks the owned underlying securities. Then, investors can invest in a said fund for different expense ratios, but they do not own the securities themselves, they are just gaining or losing on price movements.

Summing up Index Funds

From a different aspect, it can be viewed as a tool of measurement – hence the name benchmark index – to measure the performance of a market, an industry, or any group of instruments and assets. Because of its capability to cover a broad range of assets, it is considered a popular and cheap alternative instead of actively creating and managing portfolio security by security.