Differences Between Exchange Traded Funds and Index Funds for Common Investor

In the last several decades, investors have found mutual funds to be a very profitable form of investment. Due to recent economic conditions, investors have been drawn to index and exchange traded funds. In this article we will highlight some of the simple differences between exchange traded funds and Index funds. When looking at exchange traded funds and Index funds you can compare them to original mutual fund. They can be considered as cousins or relatives. If these different types of funds are so similar, then why all of the publicity and hype?

One of the main advantages to trading index traded funds and Index funds are the relatively low expense ratio involved. Index funds are not normally managed by a fund manager, as normal mutual funds are. Any managed fund such as a mutual fund that is cared for by a person incurs ongoing fees. The fund manager and his or her staff need to be paid for their time. Index funds are simple in that they simply imitate a particular index. For instance there are index funds that imitate the S&P 500, which normally outperforms funds actively managed by humans. Not only will this type of investment cost you less up front, but it might provide higher returns in the future.

Exchange traded funds are quite similar in nature to index funds. Exchange traded funds can be purchased from a broker or investment services company directly. While this is the same for common mutual funds, exchange traded funds can also be purchased by individual investors directly on the stock market. Since you have complete control over the purchase or sale of an exchange traded fund you may see several tax advantages. With common mutual funds, a fund manager will make the decision to add or remove a particular financial instrument from the fund portfolio. In other words, in a common mutual fund you could be paying taxes on a transaction that you never authorized.

For the new investor looking to invest money in a particular sector of the economy, exchange traded funds is the way to go. For instance, if you wanted to invest in a particular sector of the Chinese government, there are several exchange traded funds available for this purpose. In addition, for those investors were looking to put money into the real estate market without buying property directly, exchange traded funds can provide this service. In the past several years investors have profited from trading exchange traded funds and times where economic instability caused prices to fluctuate wildly. For instance, one could have purchased a large number of short funds, or exchange traded funds that are often traded several times per day make a gain when oil places increased.

While the degree of risk with these types of funds may be slightly higher when compared to a traditional mutual fund, exchange traded funds and Index funds are a good investment option for those willing to accept the challenge.