ETFs and index funds for beginners

Q: What is the difference between an ETF and an index fund?

Both usually copy an index. An ETF trades on a stock exchange like a share, with a live price during market hours. An index mutual fund is bought through a fund platform at one price per day.

Q: What is a TER?

The total expense ratio is the yearly cost of running a fund, shown as a percentage. A TER of 0.2% costs $20 a year for every $10,000 invested. It is taken from the fund, so you never see a bill.

Q: Do index funds beat active funds?

Not every year, but over long periods most active funds fall behind. S&P's SPIVA reports have found that close to 9 in 10 US large-company funds trailed the S&P 500 over 15 years, mainly because of their higher fees.

Q: Are index funds safe?

They spread risk across many companies, but they still fall when the whole market falls, sometimes by half. They suit long-term goals, not money you will need in the next few years.

Q: What is the MSCI World index?

An index of roughly 1,300 to 1,400 large and mid-sized companies across 23 developed countries. About 70% of it was in US companies in 2025, so it is less global than the name suggests.

Q: How much do I need to start?

Many platforms offer fractional shares or monthly plans that start with small amounts. Check the fees first: a fixed fee per trade hurts small amounts the most.

An index fund copies a market index, such as the S&P 500 or the MSCI World, by holding the same companies. An ETF (exchange-traded fund) is a fund you buy and sell on a stock exchange, like a single share. With either one, a single purchase gets you hundreds of companies, usually at a low cost.

6-minute readAssetsUpdated October 2026

S&P 500500large US companies

MSCI World~1,350companies in 23 developed countries

Broad index ETF fee<0.2%a year, often much less

US active funds behind the index~9 in 10over 15 years (S&P SPIVA)

What an index is

An index is a scoreboard for a group of shares. When the news says "the market rose 1% today", it is quoting an index. Some of the most followed:

Index	What it tracks
S&P 500	500 large US companies
Nasdaq-100	100 large non-financial companies on the Nasdaq exchange, heavy in technology
MSCI World	Roughly 1,300 to 1,400 large and mid-sized companies across 23 developed countries
MSCI Emerging Markets	Large and mid-sized companies in about 24 emerging economies
FTSE 100	The 100 largest companies on the London Stock Exchange
Euro Stoxx 50	50 large companies from eurozone countries
IBEX 35	The 35 most traded companies on the Spanish stock exchange
Nifty 50	50 large companies on the National Stock Exchange of India
IDX Composite (IHSG)	Almost every share listed on the Indonesia Stock Exchange
S&P/BMV IPC	The main index of the Mexican Stock Exchange (BMV)
Nikkei 225	225 large Japanese companies

Candlestick chart of the S&P 500 from 2000 to 2026 with a moving average. Deep falls in 2000 to 2002, 2008 and 2020 are followed by recoveries and new highs. — S&P 500, January 2000 to September 2026, built from monthly averages (each candle covers four months). The index fell hard in the dot-com crash, in 2008 and in 2020, and each time went on to new highs. Past returns are no guarantee of future ones.

Index fund vs ETF vs active fund

	Index mutual fund	ETF	Active fund
Goal	Copy an index	Usually copies an index	Beat the market
How you buy	Through a fund platform or app	On a stock exchange, through a broker	Through a fund platform or app
Price	Once a day	Live, during market hours	Once a day
Fees	Usually low	Usually low	Usually higher

Most ETFs follow an index, but not all of them. Some are actively managed, and some use borrowed money or bet on falling prices. Read the fund's name and its key information document before you buy.

Why beginners use index funds

Diversification: one purchase spreads your money across many companies, so a single failure cannot sink you.
No stock picking: you own the market instead of guessing winners.
Low cost: copying an index is cheaper than paying a team to pick shares, and you keep the difference every year.
Easy to follow: the index rules are public, so you always know what the fund holds and why.

Index vs active funds: what the data shows

Active funds pay managers to pick shares and try to beat an index. Since 2002, S&P (today S&P Dow Jones Indices) has published SPIVA reports that compare active funds with their benchmark. The results barely change from report to report: in most single years, more than half of US large-company funds trail the S&P 500, and over 15 years close to 9 in 10 do.

SPIVA reports for Europe, India, Latin America and other regions show the same pattern over long periods, although the exact share varies by market and year. The main reason is cost. A fund that charges 1% a year has to beat the market by 1% just to match a cheap index fund. Some active managers do beat the index, but it is hard to know in advance which ones.

What ETFs cost: TER and other fees

Every fund charges a yearly fee called the total expense ratio (TER) or ongoing charge. It is a percentage of your money, taken from the fund, so you never see a bill. On every $10,000 invested, a TER of 0.07% costs $7 a year, 0.20% costs $20 and 1% costs $100. Broad index ETFs on the S&P 500 or the MSCI World often charge less than 0.2% a year.

That looks tiny, but it compounds. Here is $10,000 growing at 6% a year before fees, for 30 years:

Yearly fee	After 30 years	Cost of the fee
No fee	$57,435
0.1% a year (typical index ETF)	$55,831	−$1,604
0.5% a year	$49,840	−$7,595
1% a year (typical active fund)	$43,219	−$14,216

Also check trading commissions, the ETF's spread (the gap between the buy and sell price) and currency conversion fees if you buy a fund in another currency. Then look at the tracking difference: how far the fund's return was from its index over a year. A good index fund trails its index by little more than its fee.

Risks to know

Market falls. An index fund falls with its market. The S&P 500 lost more than half its value between 2007 and 2009 and took more than five years to get back to its old high.
Concentration. Big indexes are weighted by company size. In 2025, the ten largest companies made up more than a third of the S&P 500, and about 70% of the MSCI World was in US companies.
Currency risk. If you live in Indonesia, Mexico or India and buy a fund priced in US dollars, a stronger rupiah, peso or rupee lowers your return in local money, and a weaker one raises it.
Complex products. Leveraged and inverse ETFs reset every day and can lose value even when the index ends flat. Thematic and crypto ETFs are far less diversified than a broad index.
Owning vs betting. A CFD on an ETF is a leveraged bet on its price, not a share of the fund. Most retail CFD accounts lose money.

How to get started

Build an emergency fund first.
Choose a broker or fund platform licensed by your own country's regulator.
Pick a broad index you understand, such as a global or total-market fund.
Invest a fixed amount every month (dollar-cost averaging).
Hold for years, and don't panic-sell in a crash.

Where you live shapes what you can buy. In the EU, everyday investors usually buy UCITS ETFs, often based in Ireland or Luxembourg, because most US-listed ETFs don't publish the key information document that EU rules require. In India, index funds and ETFs on the Nifty 50 and the Sensex are regulated by SEBI. In Indonesia, ETFs listed on the IDX and index mutual funds (reksa dana indeks) are supervised by OJK. In Mexico, many foreign ETFs can be bought in pesos through the Sistema Internacional de Cotizaciones (SIC).

FAQ

What is the difference between an ETF and an index fund?

Both usually copy an index. An ETF trades on a stock exchange like a share, with a live price during market hours. An index mutual fund is bought through a fund platform at one price per day.

What is a TER?

The total expense ratio is the yearly cost of running a fund, shown as a percentage. A TER of 0.2% costs $20 a year for every $10,000 invested. It is taken from the fund, so you never see a bill.

Do index funds beat active funds?

Not every year, but over long periods most active funds fall behind. S&P's SPIVA reports have found that close to 9 in 10 US large-company funds trailed the S&P 500 over 15 years, mainly because of their higher fees.

Are index funds safe?

They spread risk across many companies, but they still fall when the whole market falls, sometimes by half. They suit long-term goals, not money you will need in the next few years.

What is the MSCI World index?

An index of roughly 1,300 to 1,400 large and mid-sized companies across 23 developed countries. About 70% of it was in US companies in 2025, so it is less global than the name suggests.

How much do I need to start?

Many platforms offer fractional shares or monthly plans that start with small amounts. Check the fees first: a fixed fee per trade hurts small amounts the most.

Sources: S&P Dow Jones Indices (SPIVA scorecards), MSCI index factsheets, Robert Shiller's S&P 500 data (monthly averages to September 2026), ESMA. Educational content, not financial advice.

Can you beat the index?

Pick 5 stocks, then race a monkey and the whole index over 5 years.

Play Monkey vs Manager