Q

What's the difference between an ETF and an index mutual fund?

A

They're both funds that track parts of the market. But ETFs have no investment minimums and offer lower fees.

Think of these two kinds of funds as cousins. They have some things in common. They both help investors buy large swaths of investments in one fell swoop. And they both often concentrate those investments in a particular sector — be it stocks, bonds, real estate, the S&P 500, or lots of other things you’ve probably never thought about.

Yet they have their differences, the biggest one being the price for entry. Many index mutual funds require initial investment minimums that can be as high as a few thousand dollars. But the way in which automated investment services — like Wealthsimple — use ETFs to build portfolios allows them to eliminate minimum investment requirements. So they’re a whole lot more small-investor-friendly. And though both charge smaller fees than active mutual funds, ETFs generally have lower annual fees than index funds — although there are some exceptions. ETFs are also traded like a stock, which means they can be bought and sold throughout the trading day.

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