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Types of Investments

Index Fund Center

The Difference Between Index Mutual Funds and ETFs

Brian Mathews Nov 15, 2016




Structure



Costs


One of the biggest reasons why mutual funds have a higher cost than ETFs is because of the need for indexes to constantly rebalance, which results in commission costs that coincide with bid-ask spreads. ETFs do not have this issue due to a process called creation and redemption-in-kind that avoids these costs. Another cost issue with mutual funds has to do with something called “cash drag.” Mutual funds are required to have a certain amount of cash to cover potential net redemptions. ETFs are not required to do this, due to the same creation and redemption-in-kind feature.

Lower fees are driving investors to passively managed funds. Our article on fund management fees explains the different fees investors pay to have their funds managed.


Performance



Mutual Fund Index / Benchmark ETF
Ticker AUM (billions) Expense Ratio Ticker AUM (billions) Expense Ratio
VFINX $269.67 0.16% S&P 500 SPY $189.39 0.09%
FSTVX $34.60 0.07% Dow Jones U.S. Total Stock Market Index VTI $62.60 0.05%
FSSVX $1.87 0.23% CRSP US Small Cap Index VB $13.42 0.09%
VGSLX $60.10 0.12% MSCI US REIT Index VNQ $30.84 0.12%
VBMFX $176.00 0.16% Barclays Capital U.S. Aggregate Bond Index AGG $0.42 0.05%


Taxation



Trading



The Bottom Line


To learn more about index funds, check out our Index Funds page.

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Why 30 trillion is invested in mutual funds book