What are the major differences between Index Funds vs ETFs?
both Index Funds & ETFs are similar in their function, they tend to differ
in operational and execution characteristics. ETFs as their name suggests are
traded on their exchange in real time whereas Index funds like typical mutual
fund are not. Both seek to track and replicate their benchmark index but have
distinct differences which appeal to various types of investors. Here are a few
aspects where they differ:
Market Movement: ETFs as their name suggests are
listed and traded on the exchange allowing investors to enter and exit anytime
during the trading hours thus capitalizing on intraday moves. Index fund units
are not listed on the exchange and thus cannot be traded making entry and exit
possible only at the end of the day with the fund house.
Asset Value (NAV): Official NAV for index
funds and ETFs is calculated at the end of the day like any other mutual fund
using closing prices announced by NSE/BSE. However in case of ETFs a real time
NAV during live market hours is calculated which known as Indicative NAV or
iNAV. The Indicative NAV (or iNAV) accounts for current price movements during
the day to get as close to a real time NAV value as possible.
Effectiveness: Index Funds and ETF generally tends
to have low expense ratio as compared to active schemes. Between index funds
and ETFs, ETFs may appear to be cheaper than index funds in terms of expense
ratio; however it is worth to note cost outside expense ratio incurred by ETF
investors which includes bid-ask spread over iNAV, brokerage, exchange fees and
other transaction costs while buying and selling ETFs.
Liquidity for an index fund is provided by the respective fund house or asset
management company. Not all ETFs are liquid, hence fund house usually appoints
market makers whose mandate is provide quotes on both bids and offers to help
investors easily enter and exit ETFs, in addition large ETF investors can
buy/sell units directly with fund house.
Disclosure: Index funds and ETFs both disclose
their portfolios on a monthly basis wherein along with stocks and their
weightages. In case of ETF, as per regulatory requirement it is mandatory to publish
a form of portfolio disclosure called ‘Creation Unit’ everyday, which includes latest
portfolio holding along with weights. A creation unit is a block of new shares
created by a fund house as an issue to a large investor or to market maker for
sale in the open market.
of units: ETFs are treated like stocks and thus are
compulsorily held in a dematerialized form using a demat account. Mutual Fund
units can be held in a demat account but are typically held by the fund house itself
in a sort of pool account.
aspects: ETFs are generally preferred by
institutional investors due to sheer size and long term investment horizon, whereas
index funds are generally preferred by retail investors for a hassle free
In summary, ETFs are better suited for investors who are looking for intra-day pricing, holding in Demat format, and entry and exit via brokerage platforms. Equivalent Index Funds are better suited for investors who are looking for long-term allocation, end-day NAV pricing, and holding in non-Demat format.
What is an Index Fund?
An index fund is a type of mutual fund which constructs its portfolio by tracking the composition of a standard market index such as the Nifty 50 or the Sensex. The fund, not only invests in stocks which constitute the benchmark index, but also in ...
Does Glide Invest support ETF investments?
No, we do not support ETF investments, since we need to tie up with brokers for it. ETFs are currently not efficient as investors today overpay/undersell their investments by 1% due to poor exchange liquidity. In light of these inefficiencies, Index ...
Why are index funds popular in other parts of the world?
Index funds are considered as ideal for constructing a core portfolio for long term wealth creation due to their diversification benefits, low cost and low portfolio churn. Globally, Index funds are popular due to the following reasons – Easy - Index ...
Who manages Index Funds?
Just like actively managed mutual funds, index funds are also managed by fund managers. But fund managers have a little role to play, because constituents of index funds seldom change. Managers just buy and hold all the securities of a particular ...
Why should you invest in index funds?
Low Cost: Since index funds are passively managed, the total expense ratio (TER) is very less as compared to the actively managed ones. While an actively managed fund may charge you anything between 1-2% as TER, an index fund would typically charge ...