What are index funds?

An index fund tracks an index like the S&P 500 or Nasdaq. Meaning the fund has the same stocks in it's portfolio as the stocks that are present in the index. An index fund is not that different from an ETF which also tracks indexes most of the time. The main difference is that an index fund can only be bought at the end of the day for the NAV (net asset value) and ETFs are traded directly on exchanges just like stocks. It’s easier to buy ETFs than index funds. ETFs are also more flexible and most of the time have less maintenance fees. Another difference might be the initial costs. You can basically buy just one share from any ETF but some index funds require a larger initial buy of a few thousand dollars. Taxes may also be in favor of ETFs because you are directly buying or selling from someone else while using an index fund you are buying/selling from the fund. Most index funds are passively managed. 

You should look at the underlying costs before you determine what would be the best option for your trading strategy (ETF or index fund). Both are very similar and offer low to medium risks at very low costs.

 


Chapters: The Ultimate Investing Guide

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