Indexed securities investment fund
Index funds are funds that represent market theory. This can be a large company, a small company, or a company divided by industry. There are many choices. This is a passive form of investment, which sets rules for incorporating stocks and then tracks them without trying to beat them. Index funds cannot invest.
Investors who are interested in investing in index funds can usually invest in the same fund designed by imitating the index.
Exchange traded fund
ETF is a basket of assets traded like securities. They can be traded on public exchanges, just like common stocks, instead of mutual funds, which are only priced at the end of the day.
* * * Other differences between mutual funds and ETFs are related to the related costs of each fund. Usually, the shareholders of the same fund have no transaction costs. However, the taxes and management fees of ETF are relatively low. Passive retail investors mostly choose the same index fund instead of ETF based on the cost comparison between the two. On the other hand, passive institutional investors prefer ETF.
Compared with value investment, financial experts believe that index fund investment is a rather passive investment strategy. Both of these investments are considered as conservative long-term strategies. Value investment often attracts persistent investors who are willing to wait for bargaining. Obtaining stocks at a low price increases the possibility of long-term profit. Value investors question the market index and usually avoid active stock in order to beat the market.
So what's the difference between ETF funds and index funds?
When it comes to costs and transactions related to index tracking, ETF and index fund have their own special advantages and disadvantages. The costs involved in tracking the index are divided into three categories. A direct comparison of how ETFs and index funds handle these costs can help you make an informed decision between these two investment tools.
First of all, the daily net redemption leads to the constant rebalancing of index funds, which leads to the obvious cost in the form of commission and the hidden cost in the form of bid-ask spread in the subsequent basic fund transactions. ETF has a unique process called physical creation/redemption (which means ETF shares can create and exchange a basket of securities), which avoids these transaction costs.
Secondly, cash drag-which can be defined as the cost of holding cash to cope with the potential daily net redemption-is beneficial to ETF again. Due to the above-mentioned process of creating/redeeming physical objects, ETFs will not be dragged down by cash to this extent.
Third, dividend policy is an area where index funds have obvious advantages over ETFs. Index funds immediately invest in dividends, while the trust nature of ETFs requires them to accumulate cash in the quarter and distribute it to shareholders at the end of the quarter. If we return to the dividend-paying environment in the 1960s and 1970s, this cost will definitely become a bigger problem.
Non-tracking costs can also be divided into three categories: management fees, shareholder transaction costs and taxes. First of all, the management fees of ETFs are usually lower, because funds are not responsible for fund accounting (brokers will bear these fees for ETF holders). This is not the case with index funds.
Fourth, the transaction cost of index funds is usually zero, while ETF is not. In fact, the transaction cost of shareholders is the biggest factor that determines whether ETF is suitable for investors. Through ETF, the transaction cost of shareholders can be divided into commission and bid-ask spread. The liquidity of ETF (which may be important in some cases) will determine the bid-ask spread.