Index Fund vs. ETF: What’s the Difference?
Understanding the difference between an index fund (often invested in through a mutual fund) and an exchange traded fund (ETF) is important to understanding investing basics. Here is an overview of what an ETF is and how it differs from mutual funds.Exchange traded funds ( ETFs)
Index Mutual Funds
These types of funds follow a benchmark index, like the S&P 500, and have lower expenses and fees than funds that are actively managed.
- People interested in investing in an index fund can generally do so through a mutual fund designed to mimic the index.
Exchange Traded Funds
ETFs are baskets of assets traded like securities
- They can be bought and sold on an open exchange, just like regular stocks
- Typically, there are no shareholder transaction costs for mutual funds. Costs are lower for ETFs
- Value investing appeals to persistent and willing investors
What Do the Experts Say?
Will Thomas, CFP®, CIMA®, CTFA The Liberty Group, LLC, Washington, DC
- An index fund is a type of mutual fund that tracks a particular market index: the S&P 500, Russell 2000 or MSCI EAFE.
- ETFs are more akin to equities than to mutual funds. They are highly liquid and can be bought and sold like stock shares throughout the trading day.