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Low Cost Index Funds vs ETFs

Low Cost Index Funds vs ETFs | Side By Side Comparison

Unlike actively managed mutual funds, Index Funds and ETFs track an index rather than having a professional fund manager actively manage on a daily basis. By saving on that cost, Index Funds and ETFs charge lower fees to investors.

An average fees called expense ratio for an actively managed equity mutual funds is ~0.63% according to 2016 data from the investment company institute while for passive funds like Index Funds average expense ratio is ~0.09%.

Both Low Cost Index Funds and ETFs have many common traits but also have subtle differences. We can look at the below comparison to see the similarities and differences between them.

Index FundsETFs
What isIndex-Tracking Mutual FundsExchange Traded Funds
Use For (Similarity)Investing in pooled assets that track performance of index benchmark for portfolio diversificationInvesting in pooled assets that track performance of index benchmark for portfolio diversification
Management (Similarity)Managed professionally but “Passively”Managed professionally but “Passively”
Advantages (Similarity)Lower investment minimums
Lower expense ratio
Tax-efficient
Lower investment minimums
Lower expense ratio
Tax-efficient
How It’s TradedTrade once a day after market closesTrade like stocks intra-day means you can buy or sell on the open market throughout the day
Brokerage CommissionUsually have no brokerage commissionDepends on which brokerage you use, you may pay commission each time you buy or sell shares.
Dollar Amount vs Whole SharesYou can buy a set dollar amount even in partial sharesYou can only buy in whole shares
Automatic InvestmentAllow for automatic investment so you can set to invest monthly, quarterlyRequires you to manually trade each time

S&P 500 Index Funds & ETFs

Some of the best index funds and ETFs that track S&P 500 provide investors especially beginners an easy way to start investing while providing portfolio diversification. Instead of owning stock of a single company, a diversified funds offer holdings of 500 largest U.S. companies such as Apple, Microsoft, Amazon, Facebook, Berkshire Hathaway, Google, etc. with each company at different weight percentages that make up the total “basket” of shares.

Below are list of Index Mutual Funds that track S&P 500 by different brokerages:

  • Fidelity ZERO Large Cap Index (FNILX)
  • Fidelity 500 Index Fund (FXAIX)
  • Vanguard 500 Index Fund Investor Shares (VFINX)
  • Schwab S&P 500 Index Fund (SWPPX)

Below are list of ETFs that track S&P 500:

  • Vanguard S&P 500 ETF (VOO)
  • SPDR S&P 500 ETF Trust (SPY)
  • iShares Core S&P 500 ETF (IVV)

Key Takeaways

  • No matter which of these investment vehicles you choose, look for brokerages that offer “no transaction fee” Index Funds or “commission-free” ETFs in order to reduce cost and maximize your investment.
  • Pay attention to the expense ratio for each of the funds to avoid having large fees that eat up your investment amount.
  • Both products have their pros and cons, which of these is better for you and if you may consider them both to add to your portfolio ultimately depends on your financial goals and investment style.

The information here is for informational purpose only and should not constitute financial or investing advice. I am not a finance professional.

Hope you find this side-by-side comparison on Low Cost Index Funds and ETFs helpful.

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