When I say “low-cost index funds”, I’m talking about a special class of mutual funds. These are no-load, passive funds, designed to track a collection of companies. One of the most famous collections is the S&P 500, which is based on the market capitalizations of 500 large companies in the U.S.
But if you wanted to buy into a fund that tracked the S&P 500, there is more than one way to do it.
What I’ve always talked about is buying mutual funds. A mutual fund is defined as:
[A] type of investment company that pools money from many investors and invests the money in stocks, bonds, money-market instruments, other securities, or even cash.
But there is another investment vehicle that allows you to purchase the exact same kind of securities, but in a different way. They are called “exchange-traded funds” or ETFs.
I can give you the official definition of what an ETF is, but I’ll warn you, it’s pretty opaque.
The more important question is: do you invest in mutual funds or ETFs? Or both?
It’s time for another financial cage match!