What is Exchange Traded Fund (ETF)?
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An Exchange Traded Fund (ETF) is a fund which is generally a marketable security that tracks stocks, commodity, bonds, etc. also it includes such bunch of assets. ETFs can be bought and sold in the market just like stocks and the price of such ETFs fluctuates on the day to day basis thus they are to be considered while investing.
What are Indexed Funds?
Index mutual funds come with a portfolio made already before laying a proposal. Investors cannot make an investment through the individual stock. Indexed funds are the funds which are the passive investment in kind and the main advantage of these funds are that the expenses of management is very much low as compared to the other funds.
Also Read : Index Funds : New Emerging Investment Option
ETFs vs. Indexed Funds
There are certain differences in both these type of the investment some of them are as follows:
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- The Exchange Traded Funds (ETF) are the funds which tracks the indexes of the specific exchange whereas the index funds are the funds which are investment based on the performance of the benchmark market indexes.
- The trading of the Exchange Traded Funds (ETF) is done as like as the stocks are traded in the stock exchanges and the index funds are purchased and sold as like as the mutual funds are purchased and sold
- The pricing of the fund is a key factor in the investment, the pricing of the Exchange Traded Fund (ETF) is done like stocks only that is on the basis of demand and supply of the stocks in the recognized stock exchanges. On the other hand the pricing of the indexed funds is as like as the mutual funds, it is on the basis of the net annual value (NAV) of the assets under the concerned fund and thus they are valued on the basis of Net annual value (NAV).
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- The cost of investment also affects the profitability of the investments and also we can say that the more the cost lesser the profitability. The Exchange Traded Fund (ETF) are traded like stocks thus they have the higher maintenance cost as compared to the indexed funds as the indexed funds doesn’t have any cost as they are the passive investments.
- Though the trading costs are higher in the Exchange Traded Fund (ETF) the expense ratio is very low as compared to the indexed funds as the expense on the indexed fund is high.
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- The initial investment is also a factor which affects the investment as if the fund needs the initial investment then it will be difficult for some investors and vice versa. The Exchange Traded Fund (ETF) has no initial investment needed and on the other hand the indexed funds need some of the investment in them.
- The flexibility and the liquidity are more in the Exchange Traded Fund (ETF) compared to the indexed funds as the prices in Exchange Traded Fund (ETF) are based on the real time prices whereas the indexed funds are based on the Net Annual Values (NAV) which are considered on the basis of the price of the investment computed only once a day.