EquiFi

You want to buy an S&P 500 index fund, and your broker shows two options holding the same 500 companies — one labeled an index fund, the other an ETF. Which one should you pick? The short answer: in most cases it barely matters, because the two options are often the same portfolio in two different wrappers. What matters is the account you hold it in, whether you invest automatically, and whether the account is taxable. First, the category confusion to clear up An index fund is a strategy. An ETF is a wrapper. Comparing them directly is like comparing "vegetarian" with "takeout box." An index fund tracks a market index instead of trying to beat it. An ETF is a fund that trades on a stock exchange like a single stock. Most ETFs are index funds — but not all index funds are ETFs. Some are mutual funds. So when people ask "index funds vs ETFs," they usually mean index ETFs against index mutual funds. Both track the same indexes for nearly identic...

An index fund is a fund that tries to match a published market index, not beat it. It buys the securities in that index, in roughly the proportions the index sets, and it changes its holdings mainly when the index changes. That single design choice explains most of what follows: broad exposure, low trading, and returns that track the market it follows, minus fees. What an index is, in plain terms An index is a list with rules. It names a group of securities — for example, 500 large U.S. companies — and a method for weighting them, often by market value. You cannot buy an index directly. An index fund is the vehicle that turns that list into something you can own: it holds the securities on the list so your money moves with the group, rather than with one company’s fortunes. How the fund copies the index Some funds buy every security in the index. That approach is called full replication, and it works best when the index is not too large or hard to trade. Other funds use sampling: they ...