Index mutual funds and ETFs (exchange traded funds) are both designed or track the performance of a market index, such as the Standard & Poor's 500 index (S&P 500) or Nasdaq composite index.
A mutual fund is a company that uses money from many investors to buy stocks or other securities. Management of a mutual fund can be active, where managers buy and sell securities attempting to get a high return, or passive, where securities are mostly bought and held.
Index funds are a passive mutual fund where the securities held are intended to track a market index. The advantage to this approach is broader market exposure, low operating expenses and low portfolio turnover.
Although like an index fund in which ETF buys securities to track a market index, ETFs are not mutual funds. Rather ETFs trade in the same way that company stocks trade on a stock exchange. While the net-asset value (NAV) of a mutual fund is calculated at the end of each trading day, the price of an ETF changes throughout the day, just as a company stock price changes.
Index funds are a passive investment, where you buy shares and then sell them when ready. In comparison, you can trade ETF shares the same way that you would trade stocks.
According to Investopedia, when choosing between ETFs and index funds, the most important issues are usually management fees, your transaction costs, your tax consequences and other differences in the quality of the funds.
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