ETF and Index Fund is the same concept. However, there is some difference between the ETF and Index Fund. Both have referred from the stock market. In this article, We will do the ETF vs Index Fund and see which option will be the best for you to invest? ETF or Index Fund.
What is the ETF ( Exchange-Traded Fund)?
An Exchange-traded fund ( ETF ) is a type of investment fund and exchange-traded product, i.e. they are traded on the stock exchanges.
ETFs are similar in many ways to mutual funds, except that ETFs are bought and sold throughout the day on stock exchanges. You should know, the advantages of investing in ETF
An ETF holds assets such as stocks, bonds, currencies, and commodities such as Gold bars, and generally operates with an arbitrage mechanism designed to keep it trading close to its net asset value.
The shareholders indirectly own the assets of the fund, and they will typically get annual reports. Shareholders are entitled to A share of the profits, such as interest or dividends, and they would be entitled to any residual value if the fund undergoes liquidation.
ETFs is attractive as investments because of their reasonable costs, tax efficiency, and trade ability.
What is Index Fund?
An Index Fund is a kind of Mutual Fund. It is the same as the Mutual fund with a portfolio constructed to Follow or track the elements of the Financial market.
An Index Fund is a group of Stocks or Bonds with the best performance. It represents the overall performance of the Financial market. However, World’s famous Investor Warren Buffett, recommends investing in Index Fund.
An Index Fund is like a Passively Managed mutual fund, therefore the Fees charged (also referred to as Expense Ratio) by these Funds are low compared to the normal Mutual Funds. And most of the time a mutual fund will rise or fall the maximum amount because the Index it’s imitating.
Investing through an Index Fund may be an excellent and safe way of diversifying your portfolio as most of the benchmark indices contain big and established companies. And it’s also loved by retail or Small investors who don’t want to burn their hand while investing within the stock exchange.
The Index Fund contains the best company in their country and the retail Investors also want to invest their money in the best company in their country. The aim of both sides is the same. So, the retail investor likes to invest in Index Funds.
Common things in ETFs and Index Funds
First, the similarities. ETFs and index funds both bundle together many individual investments — such as stocks or bonds — into a particular investment, and they’ve become a most popular choice for investors for a few given reasons:
- Diversification. Just a few index funds or ETFs can lead to a highly diversified portfolio. For example, an ETF based on the S&P 500 will give you exposure to hundreds of the country’s largest companies. See a few S&P 500 ETFs here.
- Low cost. Index funds and ETFs are passively managed, meaning the investments within the fund are based on an index, which is a subset of the broader investing market. This is associated with an actively managed fund (like many mutual funds), in which a human broker is actively choosing what to invest in, resulting in higher costs for the investor in the form of expense ratios. A few actively managed ETFs do exist but for this comparison, we’ll be focused on the more-common passively managed variety. In 2018, the average annual expense ratio for passively managed funds was 0.15%, compared with actively managed funds’ average expense ratio of 0.67%.
- Good long-term returns. For long-term investors, passively managed index funds tend to outperform actively managed mutual funds. Passively managed investments follow the ups and downs of the index they’re tracking, and these indexes have historically shown positive returns. The annual total return of the S&P 500, for example, has averaged around 10% over the last 90 years.
Actively managed mutual funds may perform better in the short term because fund managers are making investment decisions based on current market conditions and their own expertise.
But the improbability that fund managers will make consistent, market-beating decisions over a long period — not to mention the higher expense ratios — can lead to lower returns over time versus passively managed funds.
So, It is better to choose ETF or Index Fund for Investment. what do you think? give your answer in the comment box below.
Difference between the ETF and Index Fund
There is some difference between the ETF and Index Fund, Below is given some reasons.
|Aim||Tracking the performance of indices of a particular exchange||Replicating the performance of a given index|
|Trade||Traded like stocks on an exchange||Units of index funds are issued like any other mutual funds|
|Price||The pricing follows the principle of shares||The NAV of the fund differs due to various factors|
|Factors affecting the price||Demand and supply for the security in the market||NAV of the fund and the assets underlying|
|Cost||A transactional fee is applicable||No transactional fee and commission|
|Expense ratio||Comparatively low then Index Fund||Comparatively high then ETFs|
ETF vs Index Fund
Let’s do, ETF vs Index Fund and see, which option will be best to choose. Both are the most popular Investments amongst the people.
The ETFs have a clear advantage over an Index Fund. However, If you looking to invest in ETF then you should have knowledge about the market. If you don’t have knowledge then you can’t bet the Index Fund.
So, If you don’t have knowledge about the financial market then go with Index Fund. It will comparatively more advantages to ETF.
In this case, you can invest in direct index funds as they come at a lower cost than normal index funds. Also, index funds are managed by professional fund managers, and they take the right decisions depending on the market situation.
So, Investing in ETF or Index Fund depend on your knowledge. I hope you understand and If you have any question then you can ask in the comment box below.