What passive investing means

Index funds and Exchange-Traded Funds (ETFs) aim to track the performance of a market index — such as the FTSE 100 or a global stock index — rather than trying to beat it through active stock-picking. Because there's no manager researching and selecting individual investments, costs are typically much lower than actively managed funds.

Index funds vs ETFs

Both track an index, but an index fund is bought and sold once a day at a single price directly through a fund platform, while an ETF trades on a stock exchange throughout the day like a share, bought through a share-dealing account or platform. For most long-term investors, the practical difference is small — cost and index choice usually matter more than the fund-vs-ETF structure.

Why low costs matter so much

Investment charges are deducted regardless of performance, and even small differences compound significantly over decades. A fund charging 0.15% a year versus one charging 1% a year can result in a materially different final pot over a 20–30 year period, purely from the fee difference — which is a core reason low-cost index funds and ETFs have become so popular with long-term investors.

Diversification in a single purchase

A single global index fund or ETF can give exposure to thousands of companies across many countries and sectors in one purchase, spreading risk far more broadly than picking individual shares — an appealing starting point for many beginner investors who want broad exposure without researching individual companies.

What they don't protect against

Index funds still rise and fall with the market they track — diversification reduces the risk of any single company's failure hurting you badly, but it doesn't protect against a broad market downturn affecting nearly everything at once. They remain a long-term investment, not a substitute for cash savings.

Key takeaways

  • Index funds and ETFs track a market index rather than trying to beat it, at low cost.
  • Low charges matter enormously over long investment periods due to compounding.
  • A single fund can offer broad diversification across many companies and countries.
  • They still carry market risk — diversification isn't the same as safety from loss.