Index funds vs ETFs – what investors need to know? | Hargreaves Lansdown (2024)

FAQs

Index funds vs ETFs – what investors need to know? | Hargreaves Lansdown? ›

Index funds only value and trade once a day, usually at midday. Unlike ETFs, investors won't know exactly what price they're buying or selling for until after the trade's taken place. ETFs on the other hand are funds traded on a stock exchange, like shares, and are a type of Exchange Traded Product.

There are typically no shareholder transaction costs for mutual funds. Costs such as taxation and management fees, however, are lower for ETFs. 2 Most passive retail investors choose index mutual funds over ETFs based on cost comparisons between the two. Passive institutional investors tend to prefer ETFs.

Mutual funds are also typically single priced, meaning the buy and sell price is the same. Whereas ETFs have different buy and sell prices, known as the ask and bid respectively.

Dealing fees are paid whenever you place a trade in other investments with HL. These include shares, investment trusts, exchange-traded funds (ETFs), gilts and bonds.

ETFs and mutual funds that track an index typically have lower management fees than actively managed ETFs or mutual funds. A mutual fund is priced once a day and all transactions are executed at that price, while the price of an ETF fluctuates throughout the day as it is bought and sold through an exchange.

Key Takeaways. Dividend ETFs invest in high-yielding dividend stocks to maintain a stable, steady income. The S&P 500 is a broad-based index of large U.S. stocks, providing growth and diversification. The best choice for you will depend on whether you prefer income or growth from your investments.

Market risk

The single biggest risk in ETFs is market risk. Like a mutual fund or a closed-end fund, ETFs are only an investment vehicle—a wrapper for their underlying investment. So if you buy an S&P 500 ETF and the S&P 500 goes down 50%, nothing about how cheap, tax efficient, or transparent an ETF is will help you.

VFIAX does not pay capital gains like typical mutual funds. Vanguard account holders who prefer a more active investing role may choose VOO. Returns, fees, and holdings are virtually identical. The difference is how you buy and sell an ETF vs how you buy and sell a mutual fund.

Both have the same expense ratio and similar dividend yield, so you should choose whichever one you prefer based on the fund's strategy. If you only want to own the biggest and safest companies, choose VOO. If you want broader exposure and more diversification, choose VTI.

Why do people use Hargreaves Lansdown? ›

We make it easy for people to save and invest for a better future. Our purpose is simple. We make it easy for people to save and invest for a better future. We support over 1.8m clients in building their financial resilience and achieving their financial goals.

Is Hargreaves Lansdown any good? Hargreaves Lansdown is a great option for both new and sophisticated investors. Its aim is to simplify investments for anyone, and the company was among the first to offer DIY investments to Britons without the need for a financial adviser.

While Vanguard is the cheaper option, HL offers a wider service and may be worth the higher fees for some investors who want more guidance and investment choices. It depends on your preferences and philosophy towards active and passive investing.

Underlying Fluctuations and Risks

ETFs, like mutual funds, are often lauded for the diversification that they offer investors. However, it is important to note that just because an ETF contains more than one underlying position doesn't mean that it is immune to volatility.

Both VFIAX, a mutual fund, and SPY, an ETF, seek to track the S&P 500. The SPY ETF may have a slight tax advantage over the VFIAX mutual fund since it's not actively managed, meaning there's less buying and selling of trades. VFIAX and SPY are generally considered strong investments, especially for passive investors.

Because index funds buy and sell stocks so infrequently, they rarely trigger capital gains taxes for investors. When it comes to tax efficiency, ETFs have the edge. Unlike index funds, ETFs rarely buy or sell stock for cash.

If you're looking for an easy solution to investing, ETFs can be an excellent choice. ETFs typically offer a diversified allocation to whatever you're investing in (stocks, bonds or both). You want to beat most investors, even the pros, with little effort.