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You are here: Home / Finance / ETF vs. Index Fund: The Difference Between ETF and Index Fund in Detail
ETF vs. Index Fund: The Difference Between ETF and Index Fund in Detail

ETF vs. Index Fund: The Difference Between ETF and Index Fund in Detail

May 3, 2020 By Cade Hildreth Leave a Comment

Over 50% of Americans now own stock, which is a big jump up from 50 years ago. ETFs and index funds make investing more accessible to the average person than ever before.

But what are these things exactly, and how can you use them?

When you start investing, you need to understand the difference between ETF and index fund investing. Here’s exactly what each of them is, why it matters, and how you can start investing today.

Index Fund vs ETF: Here’s What’s Similiar

ETF stands for exchange-traded fund. Index funds and ETFs are very similar except for a few key differences which we’ll get into in a minute.

They both work to match a predefined segment of the market. This could be large companies, small companies, or tech companies. Alternatively, it could be a stock market index like the S&P 500 or the Dow Jones Industrial Average (DJIA).

Why does that matter? When you buy an individual stock, your money grows or declines with the success of the company.

Very few investors are good at actually picking out specific stocks in companies that will be successful down the line. Warren Buffet has succeeded at this, but he dedicated his life to it and typically buys either the whole company or a large stock position in it. This gives him control of the company, which is something the average investor can’t achieve.

In contrast, both Exchange Traded Funds (ETFs) and Index Funds can be thought of as containing a “basket” of stocks.

The idea is that some companies tracked by the index will stay steady, some will flop, and some will prove to be huge successes. Hopefully, the successes will outweigh the flops.

Historically, that’s been proven to be true. The historical stock market return on average is 10%, which is pretty respectable, considering you’re lucky to get 1-2% in a high yield rate savings account.

They Both Work Towards the Same Goal

Index funds and ETFs both have the same goal—long term financial success achieved by having the price of the index fund or ETF go up in value. Of course, in recessionary periods like we’re in now, this may not occur.

Whether you invest in an ETF or index fund, ideally you want to hold them as long as possible, though you can sell them if you need to.

ETFs and index funds are not overnight get-rich-quick tools. They’re designed to help you grow your money over a long period of time, weathering all the ups and downs in the market.

Biggest Differences of ETFs vs. Index Funds

ETFs and index funds serve the same purpose, but there are a few things to consider:

ETFs trade throughout the day like stocks, but index funds can only be bought and sold at the end of the day after markets are closed.

This makes ETFs more fluid and easier to get in and out of than index funds. But if you’re holding an investment for 20 years, whether you sell at noon or 5 is likely to have little difference.

If you buy and sell commission-free, ETFs are usually cheaper than index funds.

Index funds often have a high minimum investment amount.

Vanguard has a minimum investment of $3,000 and T. Rowe Price has a minimum of $2,500. These minimum balances can make it harder for the average person to invest in index funds.

Generally, investors who buy an index fund do so through a mutual fund designed to mimic the index. This means the index fund is professionally managed. With ETFs, they are also professionally managed, but usually by SEC-registered investment advisers.

ETFs are more tax-efficient than index funds.

You own an ETF, so when you sell it, any capital gains taxes (that is, taxes on the profit) are your responsibility. Since index funds are structured differently, you may have a tax responsibility, even if you don’t sell your shares.

When you sell in an index fund, it goes to the fund manager, who sells securities to get the money for you. When there’s a profit, the gain is passed on to every investor, including the tax responsibility for that gain.

How Can I Invest in an ETF or Index Fund?

To invest in an ETF or index fund, you’ll need a brokerage account with a broker where you can buy and sell securities. Compare fees, minimum account balances, and other expenses associated with different brokers. Doing so will help you pick the best place to invest.

If you don’t know where to start, the Robinhood app is a great way  to get started.

In addition to giving you commission-free trades, it will let you manage your ETF or index fund “buy / sell” orders right from your smartphone.

When you want to invest, it’s easy to get caught up trying to find the best vehicle for your investments. But chances are, you’ll realize years have passed and you haven’t invested a dime.

It’s more important you start investing today. You can always pull your funds and transfer them to a new account in the future, and learn from your financial mistakes along the way. That’s how you learn best.

Once you start investing, keep it up! It’s thrilling and rewarding to watch your money grow. To keep investing more, watch out for lifestyle inflation. Whenever you get a bonus or promotion, invest that money and keep all of your other expenses the same.

The other way you can have more money to invest is by cutting back on expenses. There are plenty of things you can save money on, and each little bit helps when you’re looking at a good ROI over the next 20 years.

The Difference Between ETF & Index Fund Investing

Understanding the difference between ETF and index fund is a useful part of your investing knowledge.

When in doubt, simply know that the ETFs are more flexible to buy and sell, tend to have tax advantages and have lower entry thresholds. 

However, for long-term investors ETFs and index funds that track the same index (like the S&P 500 or DJIA) tend to provide extremely similar returns.

In summary, the biggest differences between an ETF and an Index Fund are:

  • ETFs trade throughout the day, but index funds are only bought or sold after the market closes
  • Index funds usually have a high minimum investment amount
  • ETFs are usually cheaper (lower management costs), when bought commission-free
  • ETFs are typically more tax-efficient than index funds

If you want to invest in the stock market, they’re both practical tools for long term investing. Don’t let the minor differences between the two hold you up. Start today, and hold on to your assets as long as you can.

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“As an LGBTQ+ entrepreneur, real estate investor, former USA Rugby Player, and fitness fanatic, I’ll teach you what your parents and teachers should’ve taught you, but didn’t know themselves.” -Cade Hildreth

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Because it’s the New Year, let’s talk about ch Because it’s the New Year, let’s talk about change...

For a long time, I’ve thought about top surgery. I remember when I was 6 or 7 years old when I wanted to run around outside on a hot, sunny day with my shirt off…and I first saw my parents… hesitate. Ughh. 

It wasn’t their fault but I still remember that heart wrenching feeling. To their credit, they ultimately said, “Ok, go do it!” While I did “do it”, I remember the feeling of shame that crept in.

Over the years, being in affirming sporting/rugby circles helped suppress the urge to get top surgery, but it never quite “stayed down.”

So last summer I got keyhole #topsurgery. I’ll talk about recovery in another post because it was definitely weird to not strength train for months.

But in THIS post, I want to share two things:

1. I am SO grateful to my wife Erin for being the supportive and growth oriented partner that she is. 🥰🙏❤️ 

She is now following her call to get a divinity degree and she’s already working in ministry as a Pastor in Training at an incredible, inclusive Presbyterian church here in Virginia. I am grateful to her for supporting me as I become more and more of who I am—and I’m enjoying watching her do the same! Love you, babe!

2. Second, I’m grateful to get to share who I am with my family. This summer we took a trip to Madden’s resort in MN to celebrate my parent’s 50th wedding anniversary. (It was actually their 52nd, because we had to postpone it twice due to Covid.)

I was nervous to be in the pools and lakes around them, but I could feel it was my only choice because I knew I wanted them to “know me”. And, how could that happen if I “hid me”?

Ultimately, I have to tell you…it was freeing to be me, as I am, who I am. 

I had the BEST time splashing around and biking and goofing around with my wife, niece, nephew, & sister. 🌊🏖🐟

So, I suppose, this is a gratitude post to thank those who have supported me over the years as I become more and more of who I am. 

Top of that list is my wife, Erin, but there are countless others. ❤️

If you’re reading this, thank YOU for being one of those people in my life too. I am deeply grateful. 🥹
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#lgbtqfamily #nonbinary
How to set a boundary? 🤔 . . . . #lgbtqia #lgb How to set a boundary? 🤔 
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1. Good and bad are labels. All things are experiences. 

2. Maturity is taking full responsibility for oneself. 

3. Having a loving, conscious relationship with myself is a core value. 

4. Emotions do not mean that anything has to be done. 

5. When I am in congruence with what I want, I have it. 

6. I have permission from myself to stop doing anything that doesn’t lead to my peace and empowerment. 

7. Stepping toward emotions and being able to feel them is a superpower. It determines the quality of my life. 

(Are there any above that you’d like me to further explain?)
 
Most importantly, which # above resonates with you? ⬆️

Happy New Year, y’all! 🎊🥳
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#lgbtqcommunity #lgbtqiaplus #lgbtsupport #nonbinary #trans #selfgrowth
Interview with Jenny Nguyen, Founder of the Sports Interview with Jenny Nguyen, Founder of the Sports Bra—The World's 1st Bar to Only Play Women's Sports - shorturl.at/doGHZ

I'm excited to introduce you to today's #podcast guest, Jenny Nguyen, who is a professional chef, elite athlete, and entrepreneur.

I invited Jenny onto the podcast because she has done something extraordinary that is long overdue: She has opened up a sports bar that exclusively plays women's sports!

Despite extensive research, Jenny hasn't found another sports bar worldwide that ONLY plays women’s sports.

Given that it's nearly 2023, this is mind-blowing. As a lifelong athlete, I find her vision compelling and inspiring.

Aptly called the "The Sports Bra", the venue is putting Jenny's culinary skills on display alongside women's sports worldwide.

The Sports Bar has taken its mission a even further by partnering with and elevating other local, women-owned businesses.

Specifically, it:

1. Sources its grass-fed beef from @CarmanRanch, an ranch run by Cory Carman, a third gen rancher out of Wallowa, Oregon).

2. Sources its alcohol from Freeland Spirits, an all-women owned and operated distillery out of NW Portland.

3. Has furniture built by @girlsbuild_org, a non-profit organization headed by @ktmhughes in Portland, OR, that teaches carpentry and construction skills to young girls as a path to empowerment.

Since opening the Sports Bra this April, people have come from ALL over the U.S. and the world to experience it—including many professional female athletes.

To learn more about Jenny as she makes history, features women's sports, and elevates women-run businesses, listen to the episode here:

shorturl.at/doGHZ

Or, you can check out the Sports Bra at:

@thesportsbrapdx
TheSportsBraPDX.com/

Have you heard of the Sports Bra or been out to experience it in person?

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Over this recent holiday stretch, we… - enjoye Over this recent holiday stretch, we… 

- enjoyed some quiet time at home
- got a sauna delivered (but not yet installed)
- decorated for the holidays
- baked a bunch
- visited our favorite farm
- did some sight seeing
- and perhaps, most importantly, survived the cold snap along with our feather friends (who lived in the garage for a few days so we could heat them with a space heater) 🥶🐔

How have the holidays treated you…and did you get hit by the winter storms? ❤️🎁☃️❄️
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