Index funds vs ETFs vs mutual funds: differences, costs and how to choose

• Mutual fund: priced once a day at net asset value, often with minimums; $31.4 trillion in U.S. mutual funds at the end of 2025.
• ETF: traded on an exchange during the day, no minimum beyond one share or a fraction; $13.4 trillion at the end of 2025.
• Index fund: a mutual fund or an ETF that tracks an index; asset-weighted fees of 0.05% (mutual funds) and 0.14% (ETFs) for equity index funds in 2025.
• Active vs index: 79% of active U.S. large-cap funds trailed the S&P 500 in 2025, and 89% over five years, according to S&P's SPIVA report.

“Should I buy an index fund or an ETF?” is one of the most searched questions about investing, and it mixes up two different things: how a fund is built and traded, and what it invests in. Once that is clear, the choice comes down to a handful of criteria, most of all cost, which compounds over decades.

This guide defines mutual funds, ETFs and index funds, compares how they trade, what they cost and how they are taxed, sets out the evidence on active versus index investing, and lists the criteria for choosing a fund. Figures come from the Investment Company Institute and S&P Dow Jones Indices.

Mutual funds, ETFs and index funds: the definitions

A mutual fund collects money from many investors and invests it in a portfolio of stocks, bonds or both. You buy and sell shares directly with the fund company, at the net asset value calculated once a day after the market closes. An exchange-traded fund (ETF) also holds a portfolio, but its shares trade on a stock exchange: you buy them through a brokerage account at the market price, at any moment of the trading day.

An index fund describes the strategy, not the structure: it holds the securities of an index, such as the S&P 500 or a total stock market index, in the same proportions, instead of relying on a manager's picks. Most ETFs are index funds, and many mutual funds are too. The guide on what an ETF is explains how ETFs replicate an index, and the one on the MSCI World and S&P 500 what the main indices contain.

ETF vs mutual fund: the differences

The tax difference comes from structure. When mutual fund investors redeem, the fund may have to sell securities and distribute the resulting gains to everyone who remains. ETFs usually handle large redemptions by handing over securities in kind, which avoids most of those sales. Inside an IRA or a 401(k), where gains are not taxed each year, the difference disappears.

What they cost

Costs are the most reliable predictor of what an investor keeps. The ICI's report on fund expenses gives the averages investors actually paid in 2025, weighted by assets:

The gap between 0.14% and 0.45% for ETFs shows that the cheapest funds hold most of the money, while many smaller ETFs charge far more. Index mutual funds come out cheaper on average because the largest of them, tracking broad indices, charge only a few hundredths of a percent. On $100,000, the difference between 0.05% and 0.45% is $400 a year, before compounding; the compound interest calculator shows what that becomes over thirty years.

Active or index funds?

An active fund pays a manager to beat the market; an index fund simply aims to match it, at a fraction of the cost. The evidence favours indexing for most investors: according to S&P Dow Jones Indices' SPIVA report published in March 2026, 79% of actively managed U.S. large-cap funds did worse than the S&P 500 in 2025, and 89% over five years. Some managers do beat their index, but identifying them in advance is hard, and their fees eat part of the edge.

How to choose an index fund or ETF

• Start with the index: total U.S. market, S&P 500, total international or total world; what the fund holds matters more than its brand.
• Compare the expense ratio: broad index funds commonly charge a few hundredths of a percent; there is rarely a reason to pay much more for the same index.
• Check the tracking difference, the gap between the fund's return and its index's, in the fund's reports.
• Look at size and trading volume for an ETF: a large, heavily traded fund has a tighter bid-ask spread.
• Think about the account: ETFs are often better in a taxable account; in a 401(k), use the low-cost index options the plan offers.
• Check minimums and loads for a mutual fund, and avoid sales charges when an equivalent no-load fund exists.

Choosing between two funds on the same index rarely matters much; choosing a high-fee fund over a low-fee one, or trading in and out, does. The guide on where to invest money explains which accounts to fill first, and the one on how to start investing in stocks walks through a first purchase.

This guide is educational and is not personalized investment advice. No fund is recommended. Investing in funds involves risk, including the loss of principal. Figures are those published in March and April 2026 for the year 2025.

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