Index Funds and Exchange-Traded Funds (ETFs) are both investments whose objective is to achieve the same return as a particular market index. Both invest primarily in the securities of companies included in that market index.

An index fund is a type of mutual fund or unit investment trust (UIT). ETFs are classified as UITs or open-end companies, but are not allowed to call themselves mutual funds. Both index funds and ETFs track a specific market index. Both types should incur lower fees and expenses, and more favorable tax benefits since turnover of stocks is less common and they do not have to be actively managed. Both carry the risk of price fluctuations that would affect a particular group of stocks in the index.

ETFs and index funds are different in that ETFs only issue shares in large blocks known as “creation units.” ETFs trade on a secondary market, which permits investors to then buy individual shares. Unlike index funds, ETFs are listed on stock exchanges and can be traded throughout the day. Since index funds are considered mutual funds, they only trade at the end of the day for their net asset value (NAV).

Index funds are usually subject to account minimums, whereas there is no minimum investment required for ETFs. The dividends from index funds can be automatically reinvested, but the dividends from ETFs must be manually reinvested. Unlike index funds, ETFs are exchange traded and can be bought on margin, sold short, and traded using stop and limit orders.

For additional information on Index Funds and ETFs, visit the Securities and Exchange Commission (SEC) Web site or the Altruist Financial Advisors Web site.