New investor just wondering what this phrase means. I have noticed this on a lot of stocks/funds: "You cannot invest directly in an index." For example: http://www.powershares.com/products/overview.aspx?ticker=dba (near the bottom of the first paragraph).
Thanks.
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An index is a composite figure tracking the performance of a specific basket of stocks (i.e. S&P 500, etc.).
An index fund specifically aims to duplicate the performance of the index it mimics; however, unlike the index itself, the fund has expenses like trading and management fees which reduce the overall return when compared to the actual index (whose performance is calculated solely by the performance of the issues making up the index, without any "real-world" expenses).
Also, index funds generally do not track the market capitalizations of the funds "exactly". To do so would incurr enormous trading costs. So they allow some deviation from the "true" index
Finally, especially in the case of indexes covering large numbers of companies, the index fund may not contain every single company.
These two cases may be accomplished with some sampling methodology to match the "model" of the index. If you notice two index funds "tracking" the same index may have some variation on returns that is not purely explained with differences in expense ratios.
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