Index Funds and ETFs
College Students and Index Funds
In a lot of my client meetings, people ask questions about different types and options for investments. Though we are not able to give investment advice, I am always happy to explain the different vehicles and some of the pros and cons for each one. A lot of my clients are interested in getting started with investing, but they feel like they do not have enough information to do so, or they are afraid that they will lose their money.
What are Index Funds?
Knowing all of this, index funds can be a great option for college students looking to get their feet wet in investing. An index fund trades like a stock, but it is composed of a bunch of different stocks, which are picked specifically to mirror one of the major stock indexes, usually either the S&P 500 or the Dow Jones Industrial Average.
What is an ETF?
ETFs (Exchange Traded Funds) are very similar to Index Funds. They both are composed of a collection of different stocks and the price moves in relation to the prices of the underlying securities. The main difference is that ETFs do not seek to track the movement of an index. Instead, they are usually seeking out some type of specific financial goal, and are made up of stocks that are in line with that goal. Some ETFs will be growth oriented, while others will have an objective of preservation of capital.
Advantages of ETFs and Index Funds
Both of these can be great options for college students who are looking to get started in investing. They provide automatic diversification of your portfolio, because they are made up of many different investments. It is also seen as a less risky investment than picking individual stocks, because if one of the stocks does poorly it makes up a very small percentage of the total investment. Overall, from beginner investors to experienced ones, ETFs and Index Funds could be a great option to consider.
Trey Lebo, Peer Coach, Center for Personal Financial Management
