While both types of investments try to passively track an underlying benchmark index, index funds and exchange traded funds are different vehicles.
Investors may have heard the of the word “indexing” being thrown around in the fund industry to describe passive strategies, but there is a difference between ETFs and mutual funds that employ passive indexing.
For example, anyone with a brokerage account can buy or sell ETFs throughout the day. Meanwhile, index funds are only priced at the end of the trading day.
Beyond the fund structures, there are a couple of scenarios where trading an ETF is more favorable than using index-based mutual funds, writes Mitch Tuchman for Forbes. Specifically, Tuchman argues that ETFs are a good tool for do-it-yourself investors who want access to broad and alternative markets through a cheap investment vehicle.
Investment advisors who use index funds may have access to cheaper funds, avoid trading costs or negotiate down brokerage fees. The investor, though, would not have these connections. Instead, the average retail investor can execute trades on broad index-based ETFs at relatively low costs or even free on some brokerages that offer commission-free trades. [Six Popular Commission-Free ETF Trading Platforms]