What's the difference between an index fund and an ETF?

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April 2017
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Both are fund structures with many similar regulations. The main differences between ETFs and mutual funds are pricing and trading.

Mutual funds are only purchased and sold at the end of the day, after the Net Asset Value (NAV) of the underlying portfolio of securities is determined, and are thereby always priced at exactly NAV. Mutual funds incur no additional cost due to a bid/ask spread or possibility of trading at a premium or a discount.

Exchange-traded funds (ETFs) are pooled investment vehicles that can be traded on the stock exchange like a single stock. Similar to stocks, ETF shares are priced and traded continuously throughout the day, with their price determined by investor demand. As a result, ETF shares could be priced higher or lower than their underlying securities’ values, known as the fund’s net asset value (NAV).

ETFs and mutual funds both have internal expenses (expense ratios) so in comparing similar funds, it remains important to compare fees. Both structures can have equally low fees. For example, Vanguard's equivalent ETF and indexed mutual fund have the same fee.

While ETFs provide intra-day liquidity for investors who trade often, long-term investors who do not have a need for this benefit can achieve the same result by using open-ended mutual funds with similar features.  By using mutual funds, an investor avoids the need to monitor bid-ask spreads and premiums/discounts of an ETF.

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