Index Exchange Traded Funds (ETFs) closely track benchmarks like the S&P 500, Dow Jones Industrial Average, or the Russell 2000. Like other exchange-traded funds, the index ETF acts as a passive mutual fund, where investors buy a basket of securities in one transaction. There are U.S. and foreign market-based index ETFs. They can also be spread out over different sectors or asset classes to diversify a portfolio. 

Index Exchange Traded Funds (ETFs) closely track benchmarks like the S&P 500, Dow Jones Industrial Average, or the Russell 2000. Like other exchange-traded funds, the index ETF acts as a passive mutual fund, where investors buy a basket of securities in one transaction. There are U.S. and foreign market-based index ETFs. They can also be spread out over different sectors or asset classes to diversify a portfolio. 

How Does an Index ETF Work?

As with any investment vehicle, you’ll need to consider the access, fees, liquidity, risk, and taxes before making a decision.

·  Access: Mutual funds can be difficult to get into, with minimal investments of $10,000 or more. By contrast, index ETFs can be purchased without any minimum requirements.

·  Fees: The fee structure of index ETFs are comparable to the cheapest no-load index mutual funds. Because they are passively managed, the expense ratios are minimal compared to other diversified investment vehicles. Standard commission rates apply, charged when buy or sell orders are made. Many brokers do offer a selection of commission-free ETFs, however.

· Liquidity: Unlike mutual funds redeemed at the Net Asset Value once at the closing of each day, index ETFs can be bought and sold throughout the day on a major exchange.

· Risk: Like other ETFs, investors can diversify across sectors, thus decreasing risk. Investing in large companies mitigates the risk of volatility. Index ETFs can deviate from the underlying asset by as much as a percentage point.

· Tax Benefits: Capital gains taxes are only assessed on ETFs when the entire investment is sold. By comparison, mutual funds incur capital gains taxes every time the assets within the fund are sold.

What is the Difference Between an Index Fund and an ETF?

There are seven key differences between an index fund and an exchange traded fund:

 

1.       Meaning

          ETFs track indexes of a particular exchange.

          Index funds replicate the performance of a benchmark market index.

2.       Base

          ETFs trade like other stocks.

          Index funds trade like mutual funds.

3.       Pricing

          ETFs are priced like stocks based on supply and demand in the market.

          Index funds are priced like mutual funds based on NAV of the underlying asset.

4.       Trading Costs

          ETFs have higher trading costs.

          Index funds have no transaction fees or commissions.

5.       Expense Ratios

          ETFs have a low expense ratio ranging from 0.1-0.5%, adjusted to the price.

          Index funds have comparatively higher expense ratios.

6.       Initial Investment

          ETFs have no minimum investment.

          Index funds typically require a few thousand dollars to get started.

7.       Settlement Time

          ETFs take three days to settle.

          Index funds require just one day, offering holders quicker access to liquid cash after a sale.

The index exchange traded fund is a popular hybrid, offering investors lower fees, lower minimum investments, and more flexibility than traditional index mutual funds. Because the holdings in a given index are more transparent, index ETFs have prices closer to the value of the underlying shares, compared to traditional ETFs.

Contact the 6th Avenue Team at Ingalls & Snyder, LLC for advice on adding the index

If you have additional questions about index exchange traded fund investing or any other investment vehicles, contact the 6th Avenue Team. Our senior directors offer more than 50 years of combined investment management experience. We hope to have the opportunity to use our holistic approach to wealth management to help you reach your financial goals.

 

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    Adam Janovic

    Senior Director

    Thomas P. DiTosto

    Senior Director

    The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.

    The 6th Avenue Team Investment Philosophy is built upon a holistic, tax efficient approach to achieving your long-term financial goals.

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