Are you wondering wheter you should invest in ETF or an index fund? We explain the two forms of investment and use a table to show how they differ.
Table of content
| What are ETFs and index funds? |
| What is the difference between ETFs and index funds? |
| ETF vs. Index Funds: differences at a glance |
| When is which type of fund preferable? |
What are ETFs and index funds?
ETF stands for “Exchange Traded Funds”. ETFs are nothing more than investment funds that are traded on the stock exchange. ETFs track an index and can be bought and sold during trading hours.
Index funds are also investment funds that replicate an index. Unlike ETFs, however, index funds cannot be traded on the stock exchange. Index funds are only traded once a day and can only be purchased from the issuer.
Both ETFs and index funds are passive funds. They do not try to outperform the market. Their sole aim is to track the market as closely as possible.
What is the difference between ETFs and index funds?
ETFs and index funds pursue the same goal. They both aim to replicate an index as accurately as possible. However, they differ in the way they are offered. While ETFs are traded on the stock exchange, index funds are not listed on the stock exchange.
Although this is a limitation, it can also offer advantages. For example, domestic index funds are not subject to stamp duty. Furthermore, index funds can reclaim more dividend withholding tax than ETFs thanks to investor scope control. Avoiding withholding tax when investing pension assets pays off. Furthermore, ETFs are only a second choice for pillar 3a.
ETF vs. Index Funds: differences at a glance
| ETF | Index fund | |
| Goal | Replicating an index as accurately as possible | Replicating an index as accurately as possible |
| Listed on stock exchange | Yes | No |
| Price setting | Continuously during trading hours | daily at NAV (Net Asset Value) |
| Liquidity | depending on size of ETF or trading volume | Unlimited liquidity (theoretical) |
| Transaction execution | During trading hours | Once a day, settlement after close of trading |
| Transaction costs | Brokerage fee, bid-ask spread | Subscription and redemption spread |
| Stamp duty | 0.075 % for domestic ETFs 0.15 % for foreign ETFs | No stamp duty for domestic funds 0.15 % subscribing to foreign funds |
| Counterparty risk | For synthetic implementation and securities lending | For securities lending |
| Withholding tax | Limited recoverability | Largely possible for pension funds with investor group control |
ETF vs. Index Fund: When is which type of fund preferable?
In principle, both ETFs and index funds are suitable for long-term investing.
ETFs are often cheaper and easier to access than index funds. In addition, the range of ETFs is significantly larger than that of index funds. Those who value flexibility are probably better off with ETFs.
If you want to make tax-optimized pension investments, index funds are better than ETFs. As index funds can generally only be traded once a day, there is also less risk of buying and selling quickly. As studies show, active management does not add value in the long term. What remains are higher costs caused by transaction fees (brokerage fees, stamp duties, etc.).
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