Index funds and ETFs are both popular ways to invest. But they are not the same thing. Knowing the difference can help you decide which one is right for your goals.
What Is an Index Fund?
An index fund is a type of mutual fund. It tracks a market index, like the S&P 500. When you invest in an index fund, you buy a share of every stock in that index.
Index funds have low fees because they do not try to beat the market. A fund manager just copies the index. This keeps costs down for investors.
You buy and sell index funds at the end of the trading day. The price is set once a day, after the market closes.
What Is an ETF?
An ETF stands for exchange-traded fund. Like an index fund, it tracks a group of stocks or other assets. But an ETF trades on a stock exchange, just like a single stock.
You can buy and sell an ETF at any point during the trading day. The price changes throughout the day as the market moves.
ETFs often have very low expense ratios. Some popular ETFs charge as little as 0.03% per year.
Key Differences Between Index Funds and ETFs
How You Buy Them
You buy an index fund directly from a fund company, like Vanguard or Fidelity. You usually need a minimum investment, often $1,000 or more.
You buy an ETF through a brokerage account, just like you would buy a stock. Many brokerages let you buy a single share, which can cost as little as $1 if you use fractional shares.
Trading Flexibility
Index funds price once per day. If you want to invest fast during a market dip, you cannot do that with a traditional index fund.
ETFs trade all day. You can set limit orders or stop-loss orders, just like with a stock. This gives you more control over the price you pay.
Fees
Both have low fees compared to actively managed funds. Index funds sometimes have no transaction fees if you buy from the fund company directly. ETFs may charge a commission depending on your brokerage, though most major brokerages have dropped commissions on ETF trades.
Minimum Investment
Index funds often require a minimum to get started. ETFs do not — you can buy as little as one share, or even a fraction of a share at some brokerages.
Tax Efficiency
ETFs tend to be more tax-efficient than index funds. This is because of how they are structured. ETFs use a process called “in-kind creation and redemption” that limits taxable events inside the fund. Index funds may create taxable capital gains distributions even when you don’t sell your shares.
Which One Is Better for You?
For most long-term investors, the difference is small. Both options give you broad market exposure at low cost.
Choose an index fund if you:
- Invest on a set schedule and want automatic contributions
- Do not want to worry about bid-ask spreads
- Prefer the simplicity of buying directly from a fund company
Choose an ETF if you:
- Want to start investing with less money
- Like the ability to trade throughout the day
- Are investing in a taxable account and want to limit taxes
How to Buy Index Funds or ETFs
You need a brokerage account to buy ETFs. For index funds, you can either use a brokerage account or open an account directly with the fund company.
Look for funds with low expense ratios — ideally under 0.20%. Some of the most popular options include:
- Vanguard Total Stock Market ETF (VTI) — 0.03% expense ratio
- iShares Core S&P 500 ETF (IVV) — 0.03% expense ratio
- Fidelity Zero Total Market Index Fund — 0.00% expense ratio
- Schwab S&P 500 Index Fund — 0.02% expense ratio
Common Questions
Can You Hold Both?
Yes. Many investors hold both index funds and ETFs in their portfolios. There is no rule that says you have to pick just one.
Are ETFs Riskier Than Index Funds?
Not usually. An ETF that tracks the S&P 500 has the same underlying risk as an index fund tracking the same index. The difference is in how you buy them, not in how risky they are.
Can You Invest in ETFs Through a 401(k)?
Most 401(k) plans offer mutual funds or index funds, not ETFs. But some newer 401(k) plans and self-directed accounts do offer ETFs. Check your plan documents to see what is available.
The Bottom Line
Both index funds and ETFs are solid choices for long-term investors. They give you broad market exposure at low cost. The best option depends on how you like to invest and what kind of account you are using.
If you are just getting started, opening a brokerage account is the first step. Look for a platform with no commissions on ETF trades and access to low-cost index funds. From there, pick a broad market fund and start investing consistently.
Want to learn more? Read our guide on best brokerage accounts for beginners or explore how a Roth 401(k) works.