How the exchange-traded fund changed investing

Buying stock remains the core way to invest in U.S. companies. It’s part of the fabric of American capital markets.

Any savvy investor knows that the key to a successful stock portfolio is diversification. A health-care company might falter while a technology company soars. Or the reverse. So, for the everyday investor, it’s good to own a little bit of both. However, most people don’t really want to be thinking about company performance every day. That’s where index funds and ETFs come into play.

Index funds allow investors to spread their money across the entire market, like buying the entire S&P 500. ETFs go a step further, allowing investors to buy sectors of the market or groups of companies. Jim Ross is an executive vice president at State Street Global Advisors. He was there when the firm launched the first ETF in 1993. “An ETF allows you to be diversified with one trade.” Ross said.

But ETFs aren’t without risk. The ETF industry faces scrutiny over bond liquidity, leverage and inverse ETFs.

To learn more about how ETFs and index funds are revolutionizing investing, watch the video above.