The problem with stock investing is that you don’t know which companies will be successful. For every Nvidia or Tesla, there are many more that fail. And this is not a “you” problem—most investors, pros included, can’t beat the market. That’s why they are better off not betting everything on a single roll of the dice but placing many smaller bets instead.⁴ This problem is so common that investment firms have developed a solution called index funds.
Index funds mirror the performance of a stock index—a group of stocks that represents the performance of a specific market. A well-known index is the S&P 500, which tracks 500 of the largest U.S. companies, including brands such as Apple or Amazon. By investing in an index fund, investors place bets on all companies included, effectively spreading their risk. One type that’s become increasingly popular are Exchange Traded Funds, or ETFs.
True to their name, ETFs are traded on an exchange, which means you can buy and sell them just like you would a regular stock. ETFs became popular for two reasons: They let everyone take part in the stock market, and they have lower costs compared to other investments.
Let’s say you wanted to buy stocks for all S&P 500 companies directly. You’ll quickly find out that buying one share each of just the top ten companies would cost you more than $3,000 (as of October 2024). It’s clear that this is out of reach for many. ETFs that track the S&P 500, on the other hand, let almost everyone place a bet on these 500 companies—many brokers have low or even no minimum investments.
Costs follow a similar logic. Every time you buy or sell an investment, you’re paying fees. If you’re making many investments, these fees add up quickly. With ETFs, you’re making a single investment instead, so you’re saving money. And since ETFs passively track an index, their management fees also are lower compared to actively managed funds.