ETFs Versus Index Funds. Which Is Better?


#1

Can someone explain the differences between both?


#2

Okay, there are a few differences…

Structure

Index funds are structured like mutual funds. If you invest in an index fund, you are investing in a basket of socks tied to a certain index.

The assets of the fund will increase and decrease, the assets are management, but you the investments will have all the same properties of a mutual funds.

ETFs are like index funds traded on the stock market - they can be bought and sold just like stocks.

Fees

There is a significant difference in fees between ETFs and Index Funds

ETFs are normally far more expensive than index funds. According to the Vanguard website, the average fee for index funds is .26%.

I would say that most ETFs are around .75% and that Vanguard’s policy of low pricing brings the average downwards.

ETFs have higher fees because it costs money to trade the shares within
product. This ends up eating into the asset value.

Index funds are generally cheaper, because Bogle’s original vision for the index fund was to track an index as cheaply as possible.

The fees on index funds vary between .25% and 1%.

Some of Vanguard’s products have a cheaper fee.

Vanguard’s flagship fund, the S&P 500 index fund charges a measly .15% per annum - 86% lower than the industry average.

Minimum Investment

ETFs have a far lower minimum investment than index funds. ETFs do not have a minimum investment in some cases, whereas index funds do.

Let’s look at a few examples:

Vanguard 500 Index Fund Admiral Shares - $10,000

Vanguard Emerging Markets Stock Fund - $3,000

Vanguard Real Estate Index Fund - $3,000

Generally speaking… the cheaper the fund - the higher the minimum investment. This is obvious, as the companies will need more assets under management to make money.

Liquidity

ETFS and Index Funds can be liquid and not liquid. This largely depends on the size of the assets under management.

You will need to watch the fund’s assets under management and the daily share volume to see how liquid the fund is.

Well-known indexes are generally far more liquid than obscure ones.

3x leveraged ETFs, inverse ETFs and short ETFs are normally very thinly traded.

If a fund is illiquid, you could find it very difficult to offload your shares, even if you’ve a absolute killing on them…

Widely traded ETFs are more liquid than popular index funds. If you want to sell an ETF, you could offload it as soon as you want to sell it. If you wanted to sell an index fund, you would need sell it like you would a mutual fund…