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 are typically single priced, meaning the buy and sell price is the same. Whereas ETFs have different buy and sell prices, known as the offer and bid. The difference between the buy and sell price is called the bid/offer spread.

The differences between the two tend to be small; in fact, index funds and ETFs are often (but not always) the same thing. Thus, which one you choose is less important than the choice to start investing. In doing so, you take advantage of low fees and diversification, and an investment that will grow over time.

An Exchange Traded Fund (ETF) is a basket of investments that usually includes shares and bonds. Funds are a ready-made investment portfolio run by a professional fund manager.

Investing legend Warren Buffett has said that the average investor need only invest in a broad stock market index to be properly diversified. However, you can easily customize your fund mix if you want additional exposure to specific markets in your portfolio.

Passive retail investors often choose index funds for their simplicity and low cost. Typically, the choice between ETFs and index mutual funds comes down to management fees, shareholder transaction costs, taxation, and other qualitative differences.

ETFs may be more accessible and easier to trade for retail investors because they trade like shares of stock on exchanges. They also tend to have lower fees and are more tax-efficient.

The choice comes down to what you value most. If you prefer the flexibility of trading intraday and favor lower expense ratios in most instances, go with ETFs. If you worry about the impact of commissions and spreads, go with mutual funds.

Transparency. Most ETFs disclose their holdings every day, allowing investors to see what's inside their portfolios daily instead of quarterly like most mutual funds. Daily transparency adds accountability and removes some of the mystique of discretionary active managers.

Is Vanguard better than Hargreaves Lansdown? ›

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.

There are no fees for trading funds.

These include shares, investment trusts, exchange-traded funds (ETFs), gilts and bonds. You do not pay dealing fees on trades that are placed as part of a monthly Direct Debit.

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.

Another reason some investors don't invest in index funds is that they may have a preference for investing in a particular industry or sector. Index funds are designed to provide exposure to broad market indices, which may not align with an investor's specific interests or values.

The bottom line is that even billionaires recognize the wealth-creation potential of low-cost index funds. Even if you're an active investor in individual stocks -- like Buffett and Dalio are -- rock-solid index funds like these four can help form an excellent backbone for your portfolio.

Lack of Global Diversification

The S&P 500 is all US-domiciled companies that over the last ~40 years have accounted for ~50% of all global stocks. By just owning the S&P 500 you miss out on almost half of the global opportunity set which is another ~10,000 public companies.

A well-diversified ETF such as one based on the S&P 500 can beat most investors over time, making it easy for regular investors to do well in the market. ETFs tend to be less volatile than individual stocks, meaning your investment won't swing in value as much.

Costs Could Be Higher

Yet, if you compare ETFs to investing in a specific stock, then the ETF costs are higher. The actual commission paid to the broker might be the same, but there is no management fee for a stock. Also, as more niche ETFs are created, they are more likely to follow a low-volume index.

Index funds—whether mutual funds or ETFs (exchange-traded funds)—are naturally tax-efficient for a couple of reasons: Because index funds simply replicate the holdings of an index, they don't trade in and out of securities as often as an active fund would.

Key Takeaways. ETFs are less risky than individual stocks because they are diversified funds. Their investors also benefit from very low fees. Still, there are unique risks to some ETFs, including a lack of diversification and tax exposure.