Index Funds vs ETFs vs Mutual Funds - What's the Difference & Which One You Should Choose?

In this video I discuss the differences between Index Funds vs ETFs vs Mutual Funds and give you my opinion on what's the best investment is for your portfolio.

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DIFFERENCES: I want to start with Mutual Funds and why I think they are a mistake to purchase in this day/age. Mutual funds have been around the longest and the biggest identifier of a mutual fund is that it is professionally managed – this is also referred to as ACTIVE management. Stocks that are chosen within a Mutual Fund are chosen by a professional stock manager.

The fund fees are often higher because well, you have to pay the mutual fund manager to do the work. Typically mutual funds charge 1-2% per YEAR on the amount that you have invested into the mutual fund, which is called their expense ratio.

Index Funds typically have low fees. Their management style is PASSIVE management. An Index Fund is like a Mutual Fund, but it has no portfolio manager, thus saving you on fees.

An Index Fund just is constructed to MATCH or TRACK the components of a financial market index, such as the S&P 500. By buying the S&P 500 Index Fund, such as VFIAX, for around $300 you get to own a small percentage of the entire index.

Index funds seek to match the risk and return of the market, on the theory that in the long-term, the market will outperform any single investment. And

SO whats an ETF then?
Well a ETF is still a basket of securities, but its main difference is that it trades on the market so you can buy and sell it throughout the day, an Index Fund however, only trades once per day.

If you buy an ETF, since it trades like a stock, you’ll still be paying some commissions on it with a typical online broker.

Since ETFs do trade on the market, you can buy and sell it as you please, which, if you want that flexibility, it’s there. However, I would just recommend buying and holding if you are purchasing an ETF that tracks the market.

The other difference is that with these online brokerages, you may be able to buy into ETFs using fractional shares – which means if you have $50 you can buy a portion of an ETF, instead where some Index Funds might have a minimum – VFIAX for example has an initial minimum of $3000.

So which one is right for you?

Overall, I don’t love Mutual Funds. So with the remaining options – I would say, go with an Index Fund if you can meet the minimums and want a very passive strategy where you don’t want to be involved in your own portfolio, with Index funds you can also automatically reinvest dividends which is super powerful. Buy an ETF if you want to have more control over your own portfolio, and if you want to buy fractionally into them.

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My name is Humphrey Yang, I make personal finance videos on YouTube, and TikTok where I have 550k+ followers! Make sure to sub to me on YouTube for two videos a week.

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Disclaimer: I am not a financial advisor, any investment commentary are my opinions only. Some of the products and services that appear on this channel are from companies that I have an affiliate relationship with, such as Robinhood, for which I recieve a small percentage made via those links, but it doesn’t cost you anything extra!

[LoughBellis]

The market's direction can swiftly change, with indexes frequently transitioning from a bear market to a bull market precisely when the news is most negative and investor sentiment reaches its lowest point.

[dorian-bh]

I've been purchasing stocks since the beginning of the year, but nothing has changed. However, I've been reading articles about people who are still in the same market who have made over $350, 000 in just a few months. What am I doing incorrectly?

[LiamThompson-cvxy]

I have added a variety of stocks and ETF to my present holdings for the long term. I also have $300k aside to start following inflation-indexed bonds and stocks of companies with solid cash flow. I strongly believe this is a good time to capitalize on the market for long term gains. But actualizing a short term profit would not be a bad idea for me at all.

[PHILIPTURNEL]

Buying a stock is easy, but buying the right stock without a time-tested strategy is incredibly hard. Hence what are the best stocks to buy now or put on a watchlist? I’ve been trying to grow my portfolio of $560K for sometime now, my major challenge is not knowing the best entry and exit strategie;s ... I would greatly appreciate any suggestions.

[Sampson-jhyq]

It's sad how difficult things have become in the present generation. I was wondering how to utilise some money I had. I used some of it for e-commerce business, but that sank. I'm thinking of how to protect my $300K stock portfolio from decline is my main concern, but I don't really know which way to go.

[jackwillison]

I've managed my retirement portfolio for 5 years with $900k in assets, but I've underperformed recently. Are there anyways to turn this around or Should I sell and switch to a High-Yield Savings Account?

[CliveBirse]

ETFs offer exposure to a wide range of assets, such as stocks, bonds, or commodities, which can help reduce risk. ETFs, like broad market index, sector-specific, and bond ETFs, are favored for long-term investments because of their diversification, reducing risk while offering growth and income potential.

[HugoBergmann-lund]

Investing in mutual funds offers a structured and diversified approach to building wealth, managed by professional fund managers. While there are costs and some limitations, the benefits of diversification, professional management, and ease of access make mutual funds a popular choice for achieving a variety of financial goals.

[LucyMcCauley]

I recently sold some of my NVDA stock to secure profits, but I'm retaining a portion for the long term. Nvidia's growth potential remains robust. I'm considering diversifying my 6-figure portfolio, but I'm uncertain about managing risks in my next move.

[Vikturneer]

This time last year I considered getting into index funds without much knowledge and decided to have a consultation with a fiduciary, and it was incredibly insightful. One year down the road, I truly cannot stress enough how helpful experts in this field are!

[Williamesq]

I did the lump sum buy at first, 125k into SCHD, 75k TSLA, 25k VYM, 25K VUG. Now I'm dca buying roughly 2k every week of whatever is on sale, and looking to add more tech positions to my portfolio. I'm looking to hold long term 15 - 20 years, so hopefully my lump sum buy in doesn't bite me in the ass long term.

[Lourd-Bab]

Amazing video, A friend of mine referred me to a financial adviser sometime ago and we got to talking about investment and money. I started investing with $150k and in the first 2 months, my portfolio was reading $274, 800. Crazy right!, I decided to reinvest my profit and get more interesting. For over a year we have been working together making consistent profit just bought my second home 2 weeks ago and care for my family.

[ilyjustinluuga]

This video was super informative! Seeing you on TikTok and following other financial/business professional accounts, I am beginning to build my way to “financial freedom”. Thank you for clarifying the Index fund and mutual fund. I almost considered putting my money into a mutual fund, but after learning how high fees could be, I’m just going to opt for an index fund.

[dris]

I was confused with these funds before but it’s SO much clearer now. Thank you for the straightforward explanation! I love your channel and I will share w my family and friends 😊

[bindah]

Nicely illustrated! Perhaps make a video on the different ways you can buy an index fund (i.e. VFV, ZSP, VSP, SPY, VOO) etc

[pelhamh]

Nice video mate. By the way, if you were adopting a monthly dollar cost averaging plan, would you do it via an index fund or an ETF?

[jacc]

Very clear and helpful : thanks! Didn’t realise mutual funds had such high fees!
BTW does each country have different index funds and are they limited to just one country’s stocks? Or are there more global’ index funds that track multiple countries’ stocks or index funds just for emerging markets etc etc ?

[kellygee]

This perfectly answers some questions a friend was asking me the other day. Now I can just share this video. Thanks, Humphrey!

[oyasuyutbe]

Omg. I’ve been doing all wrong. Please talk about more about stocks for dummies! How to choose stock, etc. Please also talk about investing per ages 30s, 40s, 50s.

[Eric-qmvm]

Great video, fantastic job explaining the similarities and differences between these investment options, and I found it very informative.
I noticed one crucial aspect missing, and that is tax liabilities associated with these investment vehicles. I believe including information about tax implications would greatly benefit your viewers.
If I remember correctly, one of the key attractions to ETFs, is the tax advantage they offer. Investors in ETFs typically do not have to pay taxes on capital gains until they sell their shares, allowing for tax deferral and potential tax savings. On the other hand, investors in mutual funds may be required to pay taxes annually on capital gains, which can impact their overall returns.
Let me know if I got it wrong.