Which is better index fund or ETF?
Typically, it comes down to preferences related to management fees, shareholder transaction costs, taxation, and other qualitative differences. Despite the lower expense ratios and tax advantages of ETFs, many retail investors (non-professional, individual investors) prefer index mutual funds.
And, in general, ETFs tend to be more tax efficient than index mutual funds. You want niche exposure. Specific ETFs focused on particular industries or commodities can give you exposure to market niches.
Key Takeaways. Dividend ETFs invest in high-yielding dividend stocks to maintain a stable, steady income. The S&P 500 is a broad-based index of large U.S. stocks, providing growth and diversification. The best choice for you will depend on whether you prefer income or growth from your investments.
Investing in both index funds and ETFs can be beneficial, as they offer different advantages. While there may be some overlap in the investments they hold, there can still be value in holding both.
Because index funds buy and sell stocks so infrequently, they rarely trigger capital gains taxes for investors. When it comes to tax efficiency, ETFs have the edge. Unlike index funds, ETFs rarely buy or sell stock for cash.
"Investors who value the flexibility to trade in real time with a variety of order types might prefer ETFs, while investors who prefer the simplicity of buying and selling shares only at the daily closing NAV might prefer a mutual fund," says Comegys. READ: 6 of the Best Fidelity Mutual Funds to Buy and Hold.
Passive retail investors often choose index funds for their simplicity and low cost. Typically, the choice between ETFs and index mutual funds comes down to management fees, shareholder transaction costs, taxation, and other qualitative differences.
For instance, some ETFs may come with fees, others might stray from the value of the underlying asset, ETFs are not always optimized for taxes, and of course — like any investment — ETFs also come with risk.
For beginners, the vast array of index funds options can be overwhelming. We recommend Vanguard S&P 500 ETF (VOO) (minimum investment: $1; expense Ratio: 0.03%); Invesco QQQ ETF (QQQ) (minimum investment: NA; expense Ratio: 0.2%); and SPDR Dow Jones Industrial Average ETF Trust (DIA).
Because ETFs are bought and sold on the open market, the sale of shares from one investor to another does not affect the fund. The sale of ETF shares does not require the fund to liquidate its holdings or generate tax implications from capital gains, keeping costs to investors lower.
What are 2 cons to investing in index funds?
The benefits of index investing include low cost, requires little financial knowledge, convenience, and provides diversification. Disadvantages include the lack of downside protection, no choice in index composition, and it cannot beat the market (by definition).
Investing legend Warren Buffett has said that the average investor need only invest in a broad stock market index to be properly diversified. However, you can easily customize your fund mix if you want additional exposure to specific markets in your portfolio.
Index funds are popular with investors because they promise ownership of a wide variety of stocks, greater diversification and lower risk – usually all at a low cost. That's why many investors, especially beginners, find index funds to be superior investments to individual stocks.
The low investment threshold for most ETFs makes it easy for a beginner to implement a basic asset allocation strategy that matches their investment time horizon and risk tolerance. For example, young investors might be 100% invested in equity ETFs when they are in their 20s.
At least once a year, funds must pass on any net gains they've realized. As a fund shareholder, you could be on the hook for taxes on gains even if you haven't sold any of your shares.
ETFs have several advantages for investors considering this vehicle. The 4 most prominent advantages are trading flexibility, portfolio diversification and risk management, lower costs versus like mutual funds, and potential tax benefits.
Neither an ETF nor an index fund is safer than the other because it depends on what the fund owns. 45 Stocks will always be riskier than bonds but will usually yield higher returns on investment.
Leveraged ETF prices tend to decay over time, and triple leverage will tend to decay at a faster rate than 2x leverage. As a result, they can tend toward zero.
Symbol | Name | 5-Year Return |
---|---|---|
XNTK | SPDR NYSE Technology ETF | 18.58% |
UPRO | ProShares UltraPro S&P500 | 18.52% |
PTF | Invesco Dorsey Wright Technology Momentum ETF | 18.33% |
QQQ | Invesco QQQ Trust Series I | 18.27% |
You expose your portfolio to much higher risk with sector ETFs, so you should use them sparingly, but investing 5% to 10% of your total portfolio assets may be appropriate. If you want to be highly conservative, don't use these at all. Consider the two funds below.
How long do you hold ETFs?
For most ETFs, selling after less than a year is taxed as a short-term capital gain. ETFs held for longer than a year are taxed as long-term gains. If you sell an ETF, and buy the same (or a substantially similar) ETF after less than 30 days, you may be subject to the wash sale rule.
- ProShares Bitcoin Strategy ETF (BITO)
- Invesco QQQ Trust (QQQ)
- Vanguard Information Technology ETF (VGT)
- VanEck Semiconductor ETF (SMH)
- Invesco S&P MidCap Momentum ETF (XMMO)
- SPDR S&P Homebuilders ETF (XHB)
- Invesco S&P 500 GARP ETF (SPGP)
References
- https://www.linkedin.com/pulse/truth-index-funds-safe-longterm-bryson-kenison
- https://www.cnn.com/cnn-underscored/money/how-to-invest-in-sp-500
- https://www.titan.com/articles/etf-drawbacks
- https://www.nerdwallet.com/article/investing/how-to-invest-in-index-funds
- https://investor.vanguard.com/investor-resources-education/taxes/how-mutual-funds-etfs-are-taxed
- https://www.lynalden.com/index-funds/
- https://www.usatoday.com/money/blueprint/investing/best-sp-500-index-funds/
- https://time.com/personal-finance/article/how-to-invest-in-index-funds/
- https://www.investopedia.com/financial-edge/0612/index-mutual-funds-vs.-index-etfs.aspx
- https://money.usnews.com/investing/articles/etf-vs-index-fund
- https://stockanalysis.com/etf/compare/spy-vs-voo/
- https://etfdb.com/compare/highest-5-year-returns/
- https://www.kiplinger.com/investing/stocks/warren-buffett-stocks-berkshire-hathaway-portfolio
- https://www.franklintempleton.com/planning-and-learning/learn-about-investing/investing-principles/cost-of-timing-the-market
- https://www.investor.gov/introduction-investing/investing-basics/investment-products/mutual-funds-and-exchange-traded-4
- https://www.fool.com/investing/2024/03/17/before-you-buy-the-vanguards-sp-500-etf-here-are-3/
- https://www.schwab.com/learn/story/etf-vs-mutual-fund-it-depends-on-your-strategy
- https://www.morningstar.com/etfs/spy-vs-voo-which-warren-buffetts-two-etfs-is-better-bet
- https://www.investopedia.com/articles/markets/101415/4-best-sp-500-index-funds.asp
- https://www.investopedia.com/articles/investing/102915/why-are-etf-fees-lower-mutual-funds.asp
- https://www.investopedia.com/financial-edge/0113/7-easy-to-understand-etfs-to-replace-a-savings-account.aspx
- https://www.fool.com/investing/2024/01/24/billionaires-cant-get-enough-of-this-etf-in-2024/
- https://www.investopedia.com/articles/investing/011316/pros-and-cons-indexes.asp
- https://www.fool.com/investing/2024/03/24/you-can-do-better-than-sp-500-buy-this-etf/
- https://talkmarkets.com/content/how-much-money-do-i-need-to-invest-to-make-3000-a-month?post=431352
- https://www.nerdwallet.com/article/investing/how-to-invest-in-sp500
- https://www.cnbc.com/2024/03/08/warren-buffett-berkshire-hathaway-owns-2-etfs.html
- https://www.investopedia.com/articles/stocks/09/reasons-to-avoid-index-funds.asp
- https://time.com/personal-finance/article/best-index-funds/
- https://www.fidelity.com/learning-center/investment-products/etf/benefits-of-etfs
- https://finance.yahoo.com/news/buffett-favors-vanguard-p-500-155700933.html
- https://www.bankrate.com/investing/best-s-p-500-index-funds/
- https://www.nerdwallet.com/article/investing/etf-vs-index-fund-compare
- https://www.linkedin.com/pulse/why-doesnt-everyone-invest-index-funds-one-gayathiri-sri-rangan
- https://www.cnbc.com/select/what-is-sp-500-how-to-invest/
- https://www.nasdaq.com/articles/here-are-the-2-warren-buffett-investments-he-recommends-the-most
- https://www.newyorklife.com/articles/index-fund-vs-mutual-fund
- https://www.quora.com/Is-it-beneficial-to-invest-in-both-index-funds-and-ETFs-or-is-it-redundant
- https://www.investopedia.com/ask/answers/033015/whats-difference-between-index-fund-and-etf.asp
- https://www.fool.com/the-ascent/buying-stocks/articles/heres-what-happens-when-you-only-invest-in-sp-500-etfs/
- https://www.investopedia.com/articles/markets/071616/history-sp-500-dividend-yield.asp
- https://www.etmoney.com/mutual-funds/featured/best-index-funds/12
- https://www.investopedia.com/articles/personal-finance/121815/buffetts-9010-asset-allocation-sound.asp
- https://www.thestreet.com/dictionary/index-fund
- https://www.investopedia.com/articles/mutualfund/05/etfindexfund.asp
- https://www.fool.com/investing/how-to-invest/etfs/etf-vs-index-fund/
- https://www.cnbc.com/2024/01/22/as-sp-500-enters-bull-market-heres-what-to-know-before-you-invest.html
- https://www.quora.com/Is-it-a-good-idea-to-invest-all-of-your-savings-into-an-S-P-500-Index-Fund-at-this-time-considering-the-current-record-highs
- https://corporatefinanceinstitute.com/resources/career-map/sell-side/capital-markets/index-investing/
- https://money.usnews.com/investing/articles/best-etfs-to-buy
- https://www.investopedia.com/articles/exchangetradedfunds/08/etf-taxes-introduction.asp
- https://www.investopedia.com/articles/investing/121515/why-3x-etfs-are-riskier-you-think.asp
- https://finance.yahoo.com/news/more-money-investing-10-000-220010726.html
- https://www.quora.com/What-percentage-of-your-portfolio-is-index-funds
- https://www.fool.com/investing/general/2013/09/21/the-best-performing-stock-on-the-sp-500-since-1980.aspx
- https://www.bankrate.com/investing/best-index-funds/
- https://www.usatoday.com/money/blueprint/retirement/best-investments-for-roth-ira/
- https://smartasset.com/investing/sp-500-average-annual-return
- https://groww.in/blog/index-funds-vs-etfs-top-differences-you-must-know
- https://www.investopedia.com/investing-in-index-funds-4771002
- https://www.investopedia.com/dividend-etf-vs-s-and-p-500-7968097
- https://www.cnbc.com/select/what-are-index-funds/
- https://www.investopedia.com/articles/investing/090115/7-best-etf-trading-strategies-beginners.asp