Author Topic: Dumb question of the day: Aren't index funds also considered mutual funds?  (Read 1119 times)

Unionville

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I've noticed that things I read  these days refer to EFT, Index funds, and mutual funds as three different things, but I always considered Index funds as a 'type' of mutual fund.  Has something changed?  When I first started investing at vanguard, the index funds were listed under the mutual fund umbrella.  Now index funds appear to be referred to as a a third type of fund and "mutual funds" seems to refer to 'managed' fund.  What's up with all that? 

MDM

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I always considered Index funds as a 'type' of mutual fund.
Yes.

PDXTabs

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ETFs and mutual funds are conceptually similar but trade differently. I don't know all the intricacies in tax law but mutual funds buy/sell at the end of the trading day while ETFs can be bought and sold at any time. Some fund providers offer the exact same index fund as both a mutual fund and an ETF. Eg, Vanguard has the ETF VT and the mutual fund VTWAX that hold the exact same underlying assets.

In practice I believe that ETFs are easier to transfer between brokerages but harder to buy fractional shares of. I hold mutual funds in my 401ks where it is the only choice and ETFs everywhere else.

evme

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I suppose I think of index funds as mutual funds that aren't actively managed (and thus have expense ratios that are minimized).

MustacheAndaHalf

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I always considered Index funds as a 'type' of mutual fund.
Yes.
Would Vanguard S&P 500 ETF be considered an index fund?
ETF stands for "Exchange Traded Fund", so I would argue the definitions are:

index funds: an ETF or mutual fund that tracks an index, the most popular being the S&P 500

mutual funds: pooled investments offered by a specific company, like Vanguard, Schwab or Fidelity.  They can only be bought and sold once per day, and only from the company that runs them.

ETFs: can be bought and sold like stocks, trading during market hours.

lutorm

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The designation is orthogonal, to me. Mutual vs exchange-traded funds are about organization and how they trade. In contrast, an index fund is a fund that attempts to track some stock market index, as opposed to a "sector fund" which actively tries to find good investments in a sector, etc.

For Vanguard, I believe they even have some special structure that means the same fund trades as both a mutual fund and an ETF, and you can convert a mutual fund position into an ETF position without a taxable event.

Tyler

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I agree that the designation is largely orthogonal.

- Mutual funds and ETFs are two types of funds defined by how they trade. ETFs trade during the day in discrete shares like individual stocks, while mutual funds sequence the transactions after hours by the penny almost like a bank account.

- Both mutual funds and ETFs can also be subdivided based on what they track. Index funds track a passive index (like the S&P 500, Russell 2000, etc). This is in contrast to actively managed funds that are subject to the trading decisions of individual fund managers.

So mutual funds can be either active funds with a manager making the calls or passive index funds that follow a set index. And ETFs have historically been index funds, but new actively managed ETFs are also becoming trendy.

When in doubt, I personally prefer ETFs that track an index. They'll be low cost, available at virtually any brokerage, not subject to the whims of manager turnover, and (because of how they're structured) will rarely report any forced capital gains that will affect your tax bill.
« Last Edit: July 18, 2022, 12:54:51 PM by Tyler »

 

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