An overview of the common misconception between Index Funds and ETF’s
By Chris Henry
Index funds and ETF's are both popular investment vehicles that many retail investors frequently either invest in or just hear the term being thrown around. They have revolutionized a way for individuals to gain broad market exposure. Both can offer broad diversification, low expenses and tax efficiency. They are distinct and differ in how they structured, traded and priced.
Index funds track the performance of a specific market index, the S&P 500 for instance. They are a type of mutual fund that trade at NAV (net asset value) and can only be bought and sold once a day at the end of trading. Investors buy or sell shares directly from the fund company.
ETF's (exchange traded funds) offer greater liquidity because they trade like stocks, with prices constantly varying throughout the day. They also offer investors a way to buy a basket of securities in a single transaction.
Both index funds and ETFs serve as excellent tools for portfolio diversification with low expense ratios. The choice between using an index fund or an ETF generally depends on the investor’s trading preferences and finanical goals.
