If you are new to the financial marketplace, you may well find yourself slightly overwhelmed by the sheer range of markets, derivatives and trading vehicles that is available. This can be difficult to overcome, particularly in an unforgiving and volatile economic climate that caused indecision to be rife.
Two of the most popular trading vehicles in the current climate are index funds and ETFs, although many confuse these as being one and the same thing. In fact there are a myriad of differences between the two, and understanding these will help you to make an informed decision.
Index Funds vs. ETFS: The Core Differences and why Index Funds may be Better
In simple terms, index funds include options like Standard & Poor’s 500 index of blue chip stocks, and requires investors to purchase all of the shares under this banner. The aim is to replicate the performance of the entire market, while trades are usually executed through an online brokerage platform such as FxPro (although this is not a prerequisite). This method of trading is an evolved subset of mutual funds, and considered to be ideal for beginners due to its simplicity and the range of options that it offers.
Conversely, ETFs are a subset of index funds, and are not sold directly by fund companies. Instead, they are listed on an exchange, while traders must have access to an online brokerage platform to buy, sell and exchange these shares. Now, while this may seem easier at first glance, this type of trading vehicle carries a far higher commission and this can complicate matters while eating into your profits. This is an important consideration, particularly for novice traders or those with minimal margins.
The Bottom Line: Why Index Funds May Offer the Best Option to Traders
While investors have quickly become enamoured with the flexibility and convenience afforded by ETFs, some of this enthusiasm revolves around the fact that the trading vehicle remains relatively new. The first ETF emerged as recently as 1993, for example, whereas index funds have existed since 1975 and stood the rigorous test of time. In terms of market volume, it is interesting to note that the total net assets within ETFs now amount to half of those associated with index funds.
Despite this, index funds remain the most popular option among traders, particularly retail investors. They also offer access to a wider range of assets and derivatives, meaning that they offer crucial flexibility during difficult economic times. Their longevity also hints at a greater sense of security for traders, particularly given the emphasis that they place on reliable, blue chip stocks.
With these factors in mind, it is easy to see why index funds remain so popular among traders (particularly inexperienced operators) at present.