ETFs or index funds? What’s the difference? Should I consider ETF and index investing or can I keep calm and invest only in stocks and bonds?
Okay, folks, relax. Take a deep breath and read the article.
ETFs vs. funds explained
Exchange traded fund or simply an ETF is a kind of index fund. Basically it’s a kind of basket filled with securities traded on an exchange. And an index fund is a form of mutual fund that tries to track the performance of a particular index.
First of all, what is an ETF?
As a rule, such a fund consists entirely of shares that are part of a certain stock exchange index, and what’s important is guided by it. This is due to the fact that the index itself is not an asset, but a measure of performance of assets over time..
For almost every stock index, there is an ETF that copies its structure. Each ETF issues its own shares and can also buy other shares and exchange-traded assets. Shares of investment funds, like ordinary securities, are traded on stock exchanges and their price can range from a few cents to several hundred dollars. The dynamics of the share price testifies to the level of the fund’s success.
Placing an order with an ETF is fairly straightforward as it doesn’t require any paperwork. ETF products commonly found in the markets include index ETFs, bond ETFs, currency ETFs, commodity ETFs.
And what about the index funds?
Well, each stock market has an index that determines the movement of part or all of the stock market. In short, an index fund is a passive investment vehicle that is structured to maintain a portfolio of all securities in the exact proportion shown in the benchmark index. If the index falls, the value of the fund’s shares also falls, and when the index rises, the value of the fund’s shares also rises. However, as all funds cost money to run, any fund will underperform its index because of this. The key is to invest in ETFs with low running costs – the lower the better.
Main similarities between index funds and ETFs:
- Passive investment vehicles that involve tracking a market index and pooling investors’ money into a basket of securities.
- Both aim to track and match the performances of certain market indices.
- Both can help to diversify your portfolio.
- Both offer exposure to a diverse range of stocks, bonds and other investments.
- Tend to be cheaper than other types of investments.
Main differences between index funds and ETFs
- ETFs are similar to stocks, and you can trade them throughout the day, unlike the index funds, which you can buy or sell only at the end of the trading day and only for the price set at the end of the trading day.
- ETF tracks a stock market index, an index fund tracks the performance of a benchmark market index.
- ETFs are nothing more than a type of index fund, and an index fund is a mutual fund.
- Usually ETFs have a lower minimum investment than index funds. To invest in an ETF most likely you’ll need to pay the same amount you would pay for a single share. On the contrary, for index funds the price could be a bit higher than a typical share price.
- The ETF value depends on the supply and demand of securities in the market. Conversely, an index fund is measured according to the net asset value (NAV) of the underlying asset.
- In an ETF orders are only placed manually, meaning you need to be logged in to place an order, while in the case of an index fund, you can automate your investments.
And yet, what to choose, ETFs or index funds?
Honestly, folks, it’s up to you. If ETFs are closer to your heart, then open your general investment account or an individual savings account and use our ISA returns calculator to predict your possible profit.
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