Index Funds vs ETFs: What’s the Difference?

If you’ve ever dipped your toes into the world of investing, you’ve probably heard the terms “index fund” and “ETF” thrown around like everyone’s supposed to just…know what they mean. The truth is, they’re not as complicated as they sound, and understanding the difference can help you choose the one that works best for you.

Let’s break it down in plain English.

First Things First: What’s an Index?

An index is simply a list of investments that represents a part of the market. Think of it like a scoreboard for stocks. For example:

• S&P 500 = 500 of the largest U.S. companies

• TSX Composite = large companies traded in Canada

• FTSE 100 = top 100 companies listed in the UK

When you buy an index fund or an ETF that tracks one of these, you’re essentially buying tiny pieces of every company on that list.

What’s an Index Fund?

An index fund is a type of mutual fund that’s designed to track an index. You don’t buy it on the stock market — instead, you buy it directly from the investment company that manages it.

• Trades: Only once per day, after the markets close

• Minimums: Sometimes there’s a minimum investment to get started

• Fees: Generally low, but can be slightly higher than ETFs

Index funds are great for set-it-and-forget-it investing. You choose your fund, set up automatic contributions, and let it grow.

What’s an ETF?

ETF stands for Exchange-Traded Fund. It also tracks an index, but it’s bought and sold on the stock exchange—just like a stock.

• Trades: Anytime during market hours

• Minimums: You can often buy as little as one share

• Fees: Usually very low

ETFs give you more flexibility, but that flexibility can tempt some people into checking the markets constantly (and maybe making impulsive trades).

How Are They Similar?

• Both are “passive” investments that track an index

• Both are diversified (you own a basket of investments, not just one)

• Both have lower fees than most actively managed mutual funds

How Are They Different?

• Buying Process: Index funds are bought from the fund provider; ETFs are bought through a brokerage

• Trading Flexibility: Index funds trade once daily; ETFs trade anytime during market hours

• Minimums: Index funds might have higher minimums; ETFs usually don’t

Which One Should You Choose?

If you like things super simple and want to set up automatic contributions, an index fund might be the way to go.
If you prefer flexibility and don’t mind placing trades yourself, ETFs could be your best friend.

At the end of the day, both can be fantastic ways to grow your wealth without having to pick individual stocks.