Table of contents
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Index funds and exchange-traded funds are two popular types of investments for investors who prefer a passive approach. Index investing can offer a low-cost way to quickly invest in a variety of stocks, bonds, or other assets. And index ETFs can give investors easy access to these types of funds throughout the trading day.

What is an index fund?

An index fund is an investment vehicle that uses an index as a benchmark and tries to replicate the index’s returns. “Index” is the strategy and “fund” is the vehicle, and funds can come in different forms: They could be index mutual funds or index exchange-traded funds (ETFs). Index mutual funds pre-date index ETFs, but index ETFs are far more popular with investors today, thanks to their low cost and ease of trading. 

One popular benchmark stock market index is the Standard & Poor’s 500 Index. The S&P 500 tracks stocks from 500 of the largest U.S. companies in different leading industries. The owner of the index uses proprietary criteria and weighting to decide which companies to include and how much weight to give each company’s stock. However, the index is only a tracker. If investors want to invest in line with the S&P 500, they have to buy an index fund that’s linked to the S&P 500. They could buy, for example, the SPY ETF or the VFIAX mutual fund. Both track the S&P 500.

What is an ETF?

An ETF pools investors’ money to invest in stocks, bonds, and other assets. ETFs are traded on stock exchanges, similar to individual companies’ stocks. However, by buying shares in an ETF, investors are investing in a fractional share of all the underlying assets. 

Most ETFs are passively managed, meaning they simply attempt to track the performance of an index—these are index funds in the form of ETFs. A number of index ETFs track the S&P 500, while others try to mirror other indexes. Still others track the entire U.S. stock market, international markets, and non-stock assets, such as bonds or commodities

Companies can also create index ETFs focused on specific industries, sectors, or values. For example, the Impact Shares NAACP Minority Empowerment ETF (NACP) tracks the Morningstar Minority Empowerment Index. In turn, the benchmark index tracks companies that have strong racial and ethnic diversity policies. 

There are also actively managed ETFs and non-traditional passive index funds, such as smart beta ETFs, which use alternative factors to decide which investments to track. These funds aim to outperform their benchmarks. They aren’t as common as the traditional passive index ETFs.

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Similarities between index mutual funds and ETFs

When an ETF tracks a market index, it is an index fund. But index funds can also be mutual funds. Index mutual funds and ETFs have the following similarities:

  • Diversification. A broad index fund could include hundreds or thousands of stocks or bonds. 
  • Low cost. Passive index funds—both mutual funds and ETFs—tend to have low management fees—called expense ratios.
  • Availability. ETFs and index mutual funds are widely available, and options abound in terms of market indexes to track.

Difference between index mutual funds and ETFs

There are also differences between index mutual funds and ETFs:

  • How they’re traded. ETFs are traded on stock exchanges during regular trading hours, while mutual funds are traded just once at the end of each trading day. 
  • Minimum and ongoing investments. Mutual funds may have an initial minimum investment requirement. Investors can then purchase additional shares for a specific dollar amount regardless of the share price. With ETFs, investors may only need to buy a single share. They may need to purchase entire shares after that, although some brokers may offer fractional shares of ETFs.  
  • Fees. In addition to expense ratios, some mutual funds charge commissions, also called load fees or 12b-1 fees.
  • Taxes. Mutual funds tend to buy and sell underlying assets more often than ETFs, which could lead to additional taxable events.
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Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see
Titan’s Legal Page for additional important information.

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Factors to consider when making investment decisions

Investors have a lot to consider when deciding where and when to invest their money. Personal financial situations, such as whether they have high-interest debt or an employer match in a retirement account, can certainly be factors, as are the investor’s goals for the money. 

Among the most important factors that investors often consider are: 

  • Risk tolerance. Investors’ risk tolerance describes their preferences for holding risky investments. An investor with a low risk tolerance might prefer a broad index fund over a leveraged index ETF because the latter can lead to larger price swings. 
  • Time horizon. An investor’s time horizon—when they’ll need the money—can also play into asset preferences and risk tolerance. Investors who need the money soon might want to avoid potentially volatile investments. 
  • Diversification. Investing in a variety of assets can help limit some types of risk. Investments can be diversified across and within asset classes. For example, one can diversify by investing in bonds and stocks, or in different types of stocks.

FAQs of index funds and ETFs

What is a leveraged ETF?

Leveraged ETFs try to mirror and multiply an underlying benchmark index’s movement. For example, if a 3X leveraged ETF tracks an index that moves up $1, the ETF may increase by $3. However, if the index drops $1, the ETF could drop by $3. 

How do ETF dividends work?

If an ETF holds stocks that pay dividends, it may distribute the proceeds to shareholders. Depending on the ETF, investors may receive these dividends quarterly or annually. Some investors may also have the option to automatically reinvest their dividends into the ETF. 

What is the SPY ETF?

The SPY ETF, or the SPDR S&P 500ETF Trust, is a popular index ETF that tracks the S&P 500 index. In turn, the S&P 500 tracks 500 large U.S. companies and often stands in for how the stock market is doing. 

How can one evaluate index funds that track the same index? 

Investors can evaluate index funds based on different criteria, including the funds’ expense ratios and historical tracking errors. The initial minimum investment and availability of index funds in a brokerage or retirement account may also be factors. 

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The bottom line

ETFs and index mutual funds can offer a low-cost way to invest in a diversified group of assets. However, passive investing does come with risks, and index funds will mirror market declines as well as gains.

Actively managed funds may charge higher fees than index funds. But in exchange, investors could benefit from fund managers’ expertise as they try to outperform—rather than match—market returns. “Ultimately, what's most important is your net take-home,” says Titan’s DeYonker.

If you’re ready to start growing your capital, Titan is ready for you. Our team of exceptional investment analysts manage hundreds of millions of dollars, investing our clients in actively-managed, long-term strategies with an eye on massive growth potential. Through our award-winning app, you’ll ride shotgun with some of the smartest investment minds in the business. Sign-up takes minutes: get started today.
Disclosures

Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, Titan has not independently verified such information and makes no representations about the accuracy of the information or its appropriateness for a given situation. In addition, this content may include third-party advertisements; Titan has not reviewed such advertisements and does not endorse any advertising content contained therein.

This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities or digital assets are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any strategy managed by Titan. Any investments referred to, or described are not representative of all investments in strategies managed by Titan, and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results.

Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Please see
Titan’s Legal Page for additional important information.

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