What is an ETF?

An ETF (Exchange-Traded Fund) is an investment tool similar to stocks but represents a basket of assets such as stocks, bonds, or commodities. Purchasing an ETF is akin to investing in a small portion of the entire market portfolio. The price of an ETF fluctuates based on the total value of the assets it holds, and investors can buy and sell ETFs through stock exchanges, similar to trading stocks.

What is an Index Fund?

Index funds operate similarly to mutual funds, but they act like a 'copy machine,' aiming to replicate the performance of a specific market index (such as the S&P 500). If the index rises, so does the value of the index fund, and vice versa. They do not require the effort of selecting individual stocks but rather invest according to the composition of the index.

Index funds operate relatively simply, and their management fees are typically lower. Therefore, index funds are suitable for investors looking to participate in the market at lower costs and lower risks.

Main Differences Between ETFs and Index Funds

Feature	ETF	Index Fund
Securities selection	Selected by fund managers	Selected based on index components
Fund Structure	Exchange-Traded Fund	Open-End Fund
Fund Units	Issued in the form of stocks, investors buy and sell shares of ETFs	Issued in the form of fund units, investors purchase units to participate in the fund.
Pricing	Determined by market supply and demand, may be higher or lower than the net asset value of the fund	Determined based on the performance of the underlying index
Trading hours	Can be traded at any time during trading hours	Can be traded at any time during trading hours
Minimum investment	No requirement	No requirement
Fee structure	Lower management fees and operational costs	Lower fees
Suitable for	Long-term/short-term investors, those with lower risk tolerance, cost-sensitive investors, and those seeking market exposure	Investors seeking a simple investment strategy and long-term investment

Many people often confuse index funds with ETFs, but the biggest distinguishing factor is that index funds can only be purchased and redeemed at net asset value, while ETFs can be freely bought and sold on the open market during trading hours.

What is an ETF?

What is an Index Fund?

Main Differences Between ETFs and Index Funds

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