Last week I posted a quick video from Fidelity that gave a nice overview of stocks and bonds for beginning investors.
I know a lot of people – beginning and advanced investors alike – have questions about index funds and ETFs (which, by the way, are great investment options for passive investors, especially when combined with a dollar-cost averaging strategy.)
So here are two short videos (2 minutes each) explaining what an index fund is and what an ETF is:
And if you really want to get crazy, here’s a slightly longer explanation of ETFs from BlackRock (4 minutes):
In summary,
Should you choose an index fund or an ETF?
That decision really comes down to: (a) which index fund or ETF best represents the asset class you want to track (there may be plenty of index funds and ETFs that track the S&P 500, but you might have a tougher time finding an index fund than an ETF that tracks midstream oil companies), (b) which has a lower expense ratio, (c) what are the transaction costs involved, and (d) what are the tax implications.
Lastly, if you’re wondering what the best investment strategy is for “small investors who don’t have time to research individual companies“, I’ll leave you with this quote from Warren Buffett:
The best [strategy] in my view is to just buy a low-cost index fund and keep buying it regularly over time, because you’ll be buying into a wonderful industry, which in effect is all of American industry. If you buy it over time, you won’t buy at the bottom, but you won’t buy it all at the top either… People ought to sit back and relax and keep accumulating over time.
