<prompt> Human: I understand the concept of compound interest, but how does it work for an ETF? Doesnt the value of the fund fluctuate year over year?Is the compounding based on dividend payouts that can be reinvested back into the ETF, then the next dividend payout is based on shares of ETF first dividend payout?Assistant: Compounding interest isnt required to be flat. ETFs are daily compounding, but we describe funds with yearly numbers to keep things averaged. So if on day 1 your funds go up 10, and on day 2 they go up to 10 again, youll see a compounded 21 gain instead of a simple 20 gain. If you just want a simple answer, stop here. The catch is that while we dont talk about it, interest can also compound negatively. A 50 loss and a 50 loss is a 75 drop, not bankruptcy. Half of half is not zero. So in a hypothetical situation where a fund fluctuates over a week, you have 10, -7, 3, -5, 9 which creates a real return of 9.11 interest. On paper youd expect a simple return of 10. Thats daily compounding at work, once you introduce negative numbers. 9.11 1.1 0.93 1.03 0.95 1.09 - 1Reinvesting dividends is another form of compounding outside of daily changes, but not every ETF pays out dividends so theyre worth considering separately. Human: Thanks that makes sense, so the power of compounding when it comes to stocks and ETFs is powerful, however, that compounding power can also affect the ETF negatively.  <response>: Yes. That is correct.Though, with a negative return compounding has a diminishing effect as opposed to an increasing impact with a positive return. 