Most ETFs are designed to track published market indexes. Index-based investing offers several benefits, including lower costs than most active management strategies and performance that seeks to track a benchmark. Click here to learn about the differences between ETFs and actively managed funds. In addition, index funds are broadly diversified since they typically hold all or many of the securities within the index. This gives you "instant" diversification that can help manage portfolio risk versus holding one or just a few individual stocks.

Understanding how indexes differ is important to selecting the most appropriate ETF for an investor’s specific objectives. For example, The Russell 2000 Index, a widely followed U.S. small-cap index, includes companies with smaller capitalizations than those in the S&P SmallCap 600, another popular index for U.S.-based small company stocks. Differences in individual index constituents can also give rise to different sector or country/geographic exposures from one index to another. The transparency of index holdings, characteristics and construction methodologies helps to ensure proper ETF selection.