What's the Difference Between an ETF vs. Index Fund?

Which one is better for you?

By Adam Levy – Updated Oct 1, 2025 at 12:01 PM | Fact-checked by Margo Winton Parodi

Key Points

ETFs trade like stocks and may have lower expense ratios, especially for niche indexes.
Index funds reinvest dividends automatically without additional fees or actions.
ETFs offer tax advantages by rarely needing to sell stocks, minimizing capital gains taxes.

Exchange-traded funds (ETFs) and index funds have a lot in common. Both are passive investment vehicles that pool investors' money into a basket of securities to track a market index. While actively managed mutual funds are intended to beat a certain benchmark index, ETFs and index mutual funds are usually intended to track and match the performance of a particular market index.

But the differences between an ETF and an index fund are not as insignificant as they might seem. It isn't just about performance or which type of fund has the best returns.

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Businessman working on laptop sitting at home office desk. — Image source: Getty Images.

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Exchange-Traded Fund (ETF)

An exchange-traded fund, or ETF, allows investors to buy many stocks or bonds at once.

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Data source: Company websites.

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Liquidity

Liquidity is the extent to which an asset can be bought or sold quickly without affecting the asset's price. Here you will learn how the importance of liquidity and how to calculate it.

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About the Author

Adam Levy is a contributing Motley Fool stock market analyst covering technology, consumer, and financial stocks and how policy, economic, and consumer trends shape personal finance, Social Security and retirement savings. Before The Motley Fool, Adam was a financial advisor at Edward Jones. He studied finance and electrical engineering at Carnegie Mellon University.

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