25/09/2025
4 Main Differences Between and
Many friends ask about the differences between ETF funds and Index funds.
There are several differences, but IтАЩm going to highlight the four main ones. The third and fourth differences are particularly significant.
First Difference
Trading Style
(Exchange-Traded Funds) are traded like , with their prices fluctuating in real-time during market hours.
On the other hand, Index Funds can only be bought or sold at the Net Asset Value (NAV) calculated at the end of the day.
Example:
- ETF: SPDR &P500 ETF (SPY) тАУ Can be traded throughout the day.
- Index Fund: Vanguard 500 Index Fund (VFIAX) тАУ Trades are processed after market closure.
Second Difference
Minimum Investment and Threshold
- ETF: No minimum investment required; you can start by purchasing even a single share.
- Index Fund: Typically requires a higher minimum investment, often ranging from $1,000 to $3,000 or more.
Example:
- Vanguard S&P 500 ETF (VOO): A single share costs around $400.
- Vanguard 500 Index Fund (VFIAX): Usually requires a minimum investment of $3,000.
Third Difference
Cost Structure
- ETF: May involve brokerage fees or commissions based on the platform, but generally has a lower expense ratio.
- Index Fund: No brokerage fees, but management costs can lead to a slightly higher expense ratio.
Example:
- S&P 500 ETF ( ): Expense ratio of 0.0945%.
- 500 Index Fund ( ): Expense ratio of 0.04%.
Fourth Difference
Flexibility and Taxes
- ETF: Taxes (capital gains) are usually based on your personal decision to sell, giving more control over tax liabilities.
- Index Fund: Fund managers can sell stocks within the fund, potentially triggering capital gains taxes for all investors holding the fund.
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