What’s the difference between ETFs and index funds?

Q: What’s the difference between exchange-traded funds (ETFs) and index funds?

This is a really good question and one that often comes up when customers are thinking about investing in equities - which, if you weren’t sure, is a collective term for either a single stock (or share) or an equity fund (a fund that holds a number of companies).

ETFs and index funds are both types of equity funds.

What is an index fund?

An index fund aims to match the performance of a specific index, such as the FTSE 100. Index funds are typically managed by investment companies and are not traded on stock exchanges. Instead, they’re priced once at the end of each trading day, based on the net asset value (NAV) of the fund’s underlying assets.

Here are some index fund ideas from our Select 50

What is an ETF?

An ETF is a type of investment fund that’s traded on a stock exchange, just like individual stocks (or shares) are. It’s also designed to track the performance of a specific index. However, you can buy and sell an ETF throughout the trading day at market prices.

We currently have seven ETFs on our Select 50 - our favourite funds, selected by experts.

1. iShares Core FTSE 100 UCITS ETF GBP
2. iShares Core MSCI EM IMI UCITS ETF USD
3. iShares Core MSCI Japan IMI UCITS ETF USD
4. iShares Physical Gold ETC
5. Vanguard FTSE 250 UCITS ETF
6. Vanguard FTSE Developed Europe ex UK UCITS ETF
7. Vanguard S&P 500 UCITS ETF

What are the main differences between ETFs and Index Funds?

The main difference between ETFs and index funds is that ETFs can be bought and sold throughout the trading day, just like individual stocks. So, they offer more flexibility to investors who want to trade frequently or take advantage of price movements throughout the day.

Index funds, on the other hand, are only priced at the end of the day and that’s the price you buy or sell them at.

Another difference is the cost structure. ETFs tend to have lower fees when compared to index funds. However, ETFs are likely to have associated trading costs, such as brokerage commissions, when buying or selling shares, whereas index funds typically don’t have these additional costs.

Which one is right for you?

When choosing between ETFs and index funds, consider factors such as your financial goals, timeline and how comfortable you are with risk. As with any investment decision, it's always a good idea to do your research before investing.

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Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates.  Select 50 is not a personal recommendation to buy or sell a fund. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.