Index funds, ETFs & mutual funds

A market index measures a defined group of securities according to published or licensed rules. It cannot usually be bought directly. An index fund seeks to track that index, before fees and tracking differences; replication method, cash, trading, and fund costs can create a gap. An actively managed fund instead follows a manager's selection process. Neither label guarantees a better outcome.

“The market” is not one universal portfolio. Indexes can be weighted by market capitalization, equal weight, price, or other rules; they can focus on one country, sector, size, or asset class. A market-cap-weighted index can become concentrated in its largest companies. Understand the exposure rather than treating a familiar index name as diversified across every risk.

An ETF trades on an exchange during the day at market prices, which can be above or below its net asset value. Authorized participants and other market participants can support creation and redemption, but spreads and premiums / discounts still matter. A mutual fund is generally purchased or redeemed at its next calculated net asset value, typically once per business day, subject to its rules.

An ETF is not necessarily passive, cheap, diversified, tax-efficient, or low-risk. Mutual funds are not necessarily active or expensive. Review the current prospectus and shareholder report: holdings, objective, benchmark, expense ratio, turnover, tracking difference, distribution history, trading liquidity, and tax consequences in your account.

• What does it own today, and how concentrated is it?
• What index / mandate does it follow, and how does that index select and weight securities?
• What is the expense ratio—and what other trading, spread, or account costs apply?
• How closely has it tracked its stated benchmark after costs, over comparable periods?
• Could the distributions or sale create a tax bill in this account?