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

Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts β€œThe Originals" podcast.

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 β€” 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 β€” 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 β€” although there are some exceptions. ETFs are also traded like a stock, which means they can be bought and sold throughout the trading day.

ETFs are advantageous in that they allow you to invest in multiple stocks and bonds. This allows you to have a more diversified investment portfolio. Many online investment platforms charge low fees and allow you to invest in ETFs.

We're certainly a little biased, but we think the best home for a first-time investor, or a hundredth time investor for that matter, is Wealthsimple. We offer state of the art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service. Get started investing with Wealthsimple today.

Last Updated October 11, 2017

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