Sound Stock Investment

Common ways to invest in the stock market are through ETFs (exchange traded funds) and mutual funds. Let me explain the difference.

ETFs passively invest in stocks. They track a stock index. For example, the ETF with ticker SPY tracks the S&P 500. There are all sorts of ETFs. There are ETFs that track the Dow Jones (DIA), the Nasdaq 100 (QQQQ), and even emerging markets (VWO). Many companies have become inventive with ETFs, tracking various sectors like energy (XLE), the commodity of gold (GLD), silver (SLV), and even US treasuries (TLT). In short, ETFs have no ‘brain.’ They just passively follow an index.

In contrast, mutual funds actively invest in stocks. They have a fund manager who chooses individual stocks. Mutual funds have a ‘brain’ behind the operation. There are many types of mutual funds. Some focus on any type of stocks, others focus on large cap or small cap stocks, other focus on certain sectors or certain countries, etc.

However, this ‘brain’ costs money. While an ETF just charges a small fee, often as low as .2% or so of assets a year, mutual funds generally charge 1%+ a year. So while you may feel more comfortable with a human choosing the stocks, remember that this human charges you for his time.